Darden has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 13.6% to $203.63 per share while the index has gained 10%.
Is there a buying opportunity in Darden, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Darden Not Exciting?
We're cautious about Darden. Here are three reasons why DRI doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Darden’s sales grew at a mediocre 6.1% compounded annual growth rate over the last seven years. This fell short of our benchmark for the restaurant sector.
2. Low Gross Margin Reveals Weak Structural Profitability
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.
Darden has bad unit economics for a restaurant company, giving it less room to reinvest and grow its presence. As you can see below, it averaged a 21.8% gross margin over the last two years. Said differently, Darden had to pay a chunky $78.24 to its suppliers for every $100 in revenue.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Darden’s EPS grew at 9% compounded annual growth rate over the last seven years. On the bright side, this performance was better than its 6.1% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
Darden isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 17.3× forward P/E (or $203.63 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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