Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Darden Restaurants, Inc. (DRI - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Darden has a trailing twelve months PE ratio of 20.02. This level compares almost similarly with the market at large, as the PE ratio for the S&P 500 comes in at about 20.48.
If we focus on the long-term trend of the stock the current level puts Darden’s near its median for the term (which stands at 18.78). Although the current level is much below the highs experienced for the stock over the observed period, it does not provide us with a conclusive direction as to the relative valuation of the stock in comparison to its historical trend.
Further, the stock’s PE also compares favorably with the Zacks classified Retail - Restaurants industry’s trailing twelve months PE ratio, which stands at 24.21. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Darden has a forward PE ratio (price relative to this year’s earnings) of 19.55 – lower than the current figure. So it is fair to say that a slightly more value-oriented path may be ahead for Darden stock in the near term too.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Darden has a P/S ratio of about 1.37. This is lower than the Zacks categorized Retail – Restaurants industry average, which comes in at 3.25 right now.
Notably, DRI is actually in the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.
Broad Value Outlook
In aggregate, Darden currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Darden a solid choice for value investors.
What About the Stock Overall?
Though Darden might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘B’ and a Momentum score of ‘C’. This gives DRI a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been trending slightly upwards lately. While the current quarter consensus estimate has remained constant in the past two months, the full year 2017 and 2018 estimates have inched up 0.3% and 0.5% respectively. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Darden Restaurants, Inc. Price and Consensus
This somewhat favorable trend is why the stock has just a Zacks Rank #2 (Buy) and why we are looking for better performance from the company in the near term.
Darden is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, a sluggish industry rank (Bottom 39% out of more than 250 industries) somewhat dims the sparkle.
The restaurant industry has been experiencing low consumption over the last few quarters as consumer discretionary spending in this space has been pretty sluggish. In addition, the company’s non-franchised model makes it susceptible to increased expenses.
Notably, the industry has widely underperformed the broader market over the last year, as you can see below:
Despite such negative broader factors, the fact remains that most of Darden’s brands have been witnessing growth over the past few quarters due to sales initiatives like simplifying kitchen systems, improving in-restaurant execution to enhance guest experience, menu innovation and technology-driven moves. The company’s Olive Garden Brand Renaissance plan–aimed to turn around its business–should continue reaping benefits. Also, the company’s efforts to check costs are commendable. Meanwhile, initiatives undertaken to attract guests at LongHorn and other units also bode well.
So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.
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