More Than Likely, Darden Has Put in a Bottom at $30

Posted Dec 24th 2009 12:30PM by Joseph Lazzaro
Filed under: Darden Restaurants (DRI), Stocks to Buy

The U.S. recession, the worst in more than 25 years, has hit the restaurant sector hard: it's left a trail of bankrupt restaurant chains and broken business models.

But not Darden Restaurants (DRI), which will be a restaurant chain survivor, and that's a major reason I'm reiterating my buy rating for the company's shares, first recommended on June 25, 2009, at a price of $32.78.

How has Darden survived while others have not during the initial stage of the "frugal consumer" era? By taking a defensive stance in the recession -- increasing its store base by only about 3%, with no significant menu price increases, and good cost controls. Also, two of Darden's chains have established niches in the casual dining segment: (1) Olive Garden, Darden's top performer, with 691 restaurants, has struck the right balance among freshness, originality, and price; and (2) Red Lobster, a 690-restaurant seafood place that has built a cadre of dedicated customers over the past two decades.

To be sure, it will be a long time -- many quarters – before enough Americans have adequate disposable incomes to make the restaurant sector attractive again: the sector most likely faces 3 to 5 years of consolidation, and reinvention, with tens of thousands of restaurant outlet closures, but look for Darden to snare a significant portion of the scare pie. Darden will be a restaurant chain survivor. The First Call FY2010/FY2011 EPS estimates for DRI are $2.75 to $3.03.

Technically, Darden's stock has meandered since the June buy rating, and it dipped below the key, 50-day moving average on several occasions while also violating support at $30. Usually, that would be cause for concern, but just as a re-evaluation was started, DRI jumped back up to $35, following a good Q2 2010 earnings report. As a result, Darden most likely has put in a bottom at/near $30.

Stock Analysis: Darden Restaurants Inc. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in DRI now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your DRI position before February 2010. Sell/stop loss if you were to buy shares in this company: $21.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: Darden Restaurants, DRI