Darden Restaurants (NYSE: DRI - option chain) stock traded lower Wednesday after the company, which includes Red Lobster and the Olive Garden, reported Q1 earnings Tuesday of $94.3 million. That is equal to 67 cents per share, which beat analysts' forecasts by a penny. However, Darden's net sales came in at $1.73 billion, missing analysts' forecasts of $1.78 billion by almost 3%. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on DRI.

DRI opened at $33.53 Wednesday. In morning trading the stock hit a high of $33.58 and a low of $32.51. As of 11:15, DRI was trading at $32.86, down $3.32 (-9.2%). The chart for DRI looks bearish and S&P gives DRI a negative 2 STARS (out of 5) sell ranking.

Restaurateur, Darden Restaurants (NYSE: DRI) announced that fourth-quarter net income checked in at 87 cents per share, up from 71 cents per share a year ago. The company also reported that sales increased to $1.97 billion from $1.82 billion. The eatery operator's sales were boosted by an extra week of business in the most recent quarter.

In a statement, the company's CEO Clarence Otis noted that the company is hoping for an improvement in overall restaurant industry conditions and sales trends, but the current challenging environment is likely to continue through all of fiscal 2010. Otis stated that "there are reasons to believe there might be some favorable changes. However, given the current level of uncertainty, we think it's prudent to be cautious in developing our plans for the year."

Darden Restaurants (NYSE: DRI) is a large player in the casual dining space. Names in its stable include Red Lobster, Olive Garden, and LongHorn Steakhouse.

With that diversification of offerings, DRI held up better than some in the restaurant space. As such, the recovery from the bottom has meant doubles instead of the triples or more.

DRI currently trades at around $34 per share -- which is cheap in my book. I would be a buyer of growth despite the gains in the near term. I rate DRI an A or Strong Buy.

Up next: Restaurant stock #3: Landry's Restaurants (LNY).

The current recession has touched all sectors. The rules of the game have been changed, and nobody is safe. The paradigm is shifting.

One of the consequences of the current state is a new-found appreciation for savings in the U.S. A consumer who does not spend is bad news for the retail sector, and it is bad news for an economy dependent on consumer spending.

The one glimmer of hope comes from the restaurant space. When it became clear that this recession would be long and deep, consumers clamped wallets shut. Dining out in this environment was an easy luxury to cut.

Darden Restaurants (NYSE: DRI - option chain) shares are headed higher today after the company reported Q3 earnings yesterday after the close of 78 cents per share, which beat estimates of only 68 cents. Also, DRI raised its outlook for 2009 earnings as well.

The markets are taking this news today as some kind of a sign that the consumer is sticking with the casual dining atmosphere and rewarding DRI stock accordingly. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on DRI.

DRI opened this morning at $33.52. So far today the stock has hit a low of $33.12 and a high of $35.64. As of 11:20, DRI is trading at $34.94, up 5.04 (16.9%). The chart for DRI looks neutral and S&P gives DRI a 3 STARS (out of 5) hold ranking.

Darden Restaurants (NYSE: DRI) operates about 1,700 casual dining restaurants in the United States and Canada. Its Red Lobster (seafood), Olive Garden (Italian cuisine), LongHorn Steakhouse (steak), Bahama Breeze (Caribbean items) and Capital Grille (steak) chains cater to families, with mid-priced menu items and generally suburban locations. A small group of Seasons 52 restaurants feature a casual grill and wine bar concept. Brinker International (NYSE: EAT) and Chipotle Mexican Grill (NYSE: CMG) are competitors.

The company pleased investors last week, when it reported fiscal Q3 EPS of 85 cents and revenues of $1.81 billion. Analysts had been looking for 82 cents and $1.80 billion. Management also guided FY08 EPS to about $2.71-$2.76 ($2.72 consensus) and FY08 revenues to about $6.63-$6.68 billion ($6.64B consensus). Raymond James subsequently upgraded the shares to "strong buy".

Darden Restaurants (NYSE: DRI) operates about 1,700 casual dining restaurants in the United States and Canada. Its Red Lobster (seafood), Olive Garden (Italian cuisine), LongHorn Steakhouse (steak), Bahama Breeze (Caribbean items) and Capital Grille (steak) chains cater to families, with mid-priced menu items and generally suburban locations. A small group of Seasons 52 restaurants feature a casual grill and wine bar concept. Brinker International (NYSE: EAT) and Chipotle Mexican Grill (NYSE: CMG) are competitors.

The company pleased investors last week, when it guided fiscal Q3 EPS to 83-85 cents. Analysts had been looking for 77 cents. Management also said it expected Y08 EPS of about $2.71-$2.76 ($2.66 consensus).

Darden Restaurants Inc. (NYSE: DRI) stock has fallen sharply this morning after Tuesday afternoon's announcement that net income for the second quarter fell to $43.5 million, or 30 cents a share, down from $61.7 million, or 41 cents, earned a year ago. The restaurant operator blamed the acquisition of RARE Hospitality and a "difficult consumer environment" for the drop. Analysts had expected DRI to earn 50 cents a share on revenue of $1.54 billion. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on DRI.

After hitting a one-year high of $47.60 in June, the stock hit a one-year low of $35.31 yesterday, which it has broken by a good measure this morning. Today, DRI opened at $31.72. So far today the stock has hit a low of $29.80 and a high of $31.85. As of 10:50, DRI is trading at $30.21, down 6.13 (-16.9%). The chart for DRI looks bearish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.

For a bearish hedged play on this stock, I would consider a July bear-call credit spread above the $40 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.3% return in 7 months as long as DRI is below $40 at July expiration. Darden would have to rise by more than 32% before we would start to lose money.

An Orlando outfit became the number one casual dining operator in North America by offering multiple dining experiences to the critical family crowd.

Darden Restaurants (NYSE: DRI) operates more than 1,300 casual dining restaurants in the United States and Canada. Its Red Lobster (seafood), Olive Garden (Italian cuisine) and Bahama Breeze (Caribbean items) chains cater to families, with mid-priced menu items and suburban locations. A small group of Seasons 52 restaurants feature a casual grill and wine bar concept. Brinker International (NYSE: EAT) and Chipotle Mexican Grill (NYSE: CMG) are competitors.

The company pleased investors last month, when it reported fiscal Q1 EPS of 73 cents and revenues of $1.47 billion. Analysts had been expecting 70 cents and $1.45 billion. Management also guided FY08 revenues to about $6.25-6.31 billion, versus consensus of $6.08 billion. The company confirmed that it plans to buy back $125-175 million of its common stock in FY08.

Darden Restaurants Inc (NYSE: DRI), the casual dining restaurant chain that owns and operates the Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill, and Seasons 52 restaurant concepts, reported disappointing earnings last night after market close -- missing the consensus on both EPS and revenues.

As analysts expected the company to trade mostly in-line with their expectations, the terrible earnings report came as a negative surprise coming from the stock that had been upgraded nine times over the course of the past year. The company traded down 3.39% in pre-market trading, after trading near lifetime highs prior to the release.

Several analysts feel that Darden's reported $55.1 million loss for Q4 is reflective of a charge-off for selling 65 Smokey Bones restaurants over the past quarter; the company put another 73 Smokey Bones' restaurants up for sale in the quarter.

Following the decision to sell many of the Smokey Bones restaurants, CEO Clarence Otis said that the company would remain optimistic about making a "major acquisition." Let's face it, with their earnings, right now they need it.

Darden Restaurants (NYSE: DRI), owners of Red Lobster, Olive Garden, Bahama Breeze and Smokey Bones, posted 3Q 2006 earnings recently. In its press release, Darden Restaurants management claims record diluted net earnings of 0.72 per share, a 7% increase over 3Q 2005. Net sales increased 4.7% to $1.54 billion.

Sounds good so far. But Darden bought back 4.3 million of its own shares this quarter. This dilutes the number of shares outstanding so the 7% increase in earnings per share is actually closer to 1.5%. Total earnings per share budged up a little bit to $106.4 million for the quarter.

Darden's press release trumpets the fact that Olive Garden recorded its 50th consecutive quarter of same-restaurant sales growth. This quarter sales were up 1%, just barely enough to keep the streak alive. 3Q revenues were up to $722.4 million, in part due to a net increase of 28 new Olive Garden locations.

Same-restaurant 3Q sales were up 4.6% at Red Lobster, with overall sales up to $684.2 million. 3Q sales were down less than 1% at Bahama Breeze, to $38 million. Likewise, 3Q sales were down 1.5% to $87.2 million at Smokey Bones.

Darden management forecasts very modest sales growth of 2-3% for FY 2007, while opening 35-40 new locations throughout the year.

There are going to be a couple of big names tomorrow reporting earnings. Three of the biggest companies to keep an eye on in tomorrow's market will be Morgan Stanley, Federal Express and Darden Restaurants.

Morgan Stanley (NYSE: MS) will be announcing their first quarter 2007 earnings tomorrow before the market opens. The company is expected to report earnings for the quarter of $1.88 per share. During the first quarter in 2006 the company put up $1.51 per share. The last time MS reported earnings was on December 19th when the posted earnings per share of $2.08 which easily beat analysts estimates of $1.77. The stock has traded up 1.4% so far today to $76.04 up $1.02.

FedEx Corp (NYSE: FDX) is going to be reporting earnings tomorrow before the bell as well. The company is due to report their third quarter earnings and analysts are expecting to see $1.33 per share. During the same period a year ago FedEx posted $1.38 per share. The company last reported earnings on December 19th and beat estimates at that time by coming in with $1.89 compared to analysts estimates of $1.76. On the day FDX has traded pretty flat. The stock is currently trading down 0.2% to $112.27 down $0.21.

Darden Restaurants (NYSE: DRI) is going to be releasing their third quarter 2007 earnings tomorrow afternoon following the market close. Analysts are expecting the company to report $0.70 per share compared with $0.67 for the same period a year ago. The company beat estimates of $0.40 when they last reported earnings of $0.41 back on December 19. The stock has seen some nice upside today picking up 1.7% to $41.36 up $0.69.

Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor's Observer.

MOST NOTEWORTHY: Circuit City (CC) and Best Buy (BBY) were the most notable upgrades today:

• JP Morgan upgraded Circuit City Stores Inc. (NYSE:CC) to Overweight from Neutral, telling clients it is taking advantage of more realistic expectations and valuation; they also see some positive catalysts in 2008 that may include product introductions, such as Microsoft Corp.'s (NASDAQ:MSFT) Vista and the availability of the PS3 from Sony Corp. (NYSE:SNE) and Nintendo Ltd.'s (OTC:NTDOY) Wii.
• Credit Suisse upgraded Best Buy Co. Inc. (NYSE:BBY) to Outperform from Neutral with a $59 target, telling clients the focus on the electronics retailer has moved too much into the slight shortfall of Q3, which undervalues the solid growth through 2007 as well as the strong balance sheet the company enjoys.

OTHER UPGRADES:

• Darden Restaurants Inc. (NYSE:DRI) was upgraded to Market Perform from Underperform at Raymond James.
• Accenture Ltd. (NYSE:ACN) was upgraded to Sector Perform from Underperform at RBC Capital Markets, and believes that strong demand for consulting, solid outsourcing visibility, and strong financial fundamentals are likely to offset the negative impact of offshore labor cannibalization in the near-term; Baird also upgraded Accenture, to Outperform from Neutral with a $39 target, following strong first quarter earnings and guidance.
• Deutsche Bank is positive on Publicis Groupe (NYSE:PUB) acquisition of Digitas Inc. (NASDAQ:DTAS) and upgraded the acquirer to Buy from Hold.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Stock futures are negative in early morning trade, indicating to a similar start for stocks.

Several key factors will affect the market today: Investors will try to gain a better understanding of economic condition when inflation and housing market data are released. These will be weighed against disappointing financial results from Oracle. Meanwhile, Asian markets could also push markets down.

The Thai stock market suffered a 19% plunge and consequently a suspension in trading. It closed down 14.8%. This was due to measures taken by the Thai Central bank trying to strengthen the baht and putting constraints on foreign investments. In return, foreign investors pulled the plug. Other Asian markets sold off as well with the Hang-Seng and the Nikkei shedding 1%.

At home, an hour before the start of the trading session, November housing starts and building permits are due. A measure of inflation, producer price index will also be released at that time. Economists expect a 0.5% gain in November PPI compared to a 1.6% decline in October and a 0.2% increase in core PPI -- ex-food and energy -- compared with a 0.9% decline the month before. Any indication that either the housing market has seen its trough or better readings on the inflation front, could help stocks.

Oracle Corp. (NASDAQ:ORCL) posted second quarter earnings late yesterday. Net income rose to $967 million, or 18 cents per share, from $798 million, or 15 cents per share, a year ago. Revenue rose 26% to $4.2 billion. These matched analyst expectations. However, new software licenses were below expectations and shares plunged more than 2.5% in after-hour trading.

According to the Wall Street Journal, eBay Inc. (NASDAQ:EBAY) is expected to announce Tuesday a new partnership and joint-venture in China. eBay will partner with Tom.com and together they will open a new Chinese Web site to be operated by Tom Online Inc. eBay will hold a 49% stake in the new site and Tom Online 51%.

Pfizer Inc. (NYSE:PFE) said Monday Chief Executive Jeffrey B. Kindler will also become chairman on Tuesday as the world's largest company raised its first-quarter dividend 21%.

AT&T Inc. (NYSE:T) and BellSouth (NYSE:BLS) much talked about merger is now doubtful as Monday Robert McDowell, a member of the Federal Communications Commission and a former telecommunications industry lobbyist, said he will not be voting on the deal.

Reporting today are:

MOST NOTEWORTHY: Nokia (NOK) and selected restaurants topped today's extensive list of downgrades:

• Due to slowing in the wireless sector, Oppenheimer downgraded shares of Nokia Corp. (NYSE:NOK) to Neutral from Buy, following Texas Instruments' (NYSE:TXN) lowered guidance;
• Citing valuations and a deteriorating outlook, Buckingham downgraded shares of Darden Restaurants Inc (NYSE:DRI) and Wendy's Inernational Inc. (NYSE:WEN) to Neutral from Accumulate, as well as Yum! Brands Inc. (NYSE:YUM) and Jack in the Box Inc. (NYSE:JBX) to Underperform from Neutral.

OTHER DOWNGRADES:

• JP Morgan downgraded Micron Technology Inc. (NYSE:MU) to Neutral from Overweight based on concerns of growing inventory levels and a weaker-than-expected flash market in the first half of 2007.
• Citigroup Inc. (NYSE:C) was removed from Sandler's Focus List.
• Calyon downgraded Johnson Controls Inc. (NYSE:JCI) to Neutral from Buy with an $85 target, citing valuation and the weakening economy.
• RBC Capital Markets downgraded Alcoa Inc. (NYSE:AA) to Underperform from Sector Perform on valuation.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).