Is Darden Restaurants a Bargain Here?

With shares of Darden Restaurants (NYSE:DRI) trading at around $45.15, is DRI an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

dardenDarden Restaurants has been a great investment since its IPO, but that kind of consistent stock performance might be in jeopardy. A while back, it was reported that Darden Restaurants would cut employee hours to avoid healthcare costs. This negative press then supposedly led to a profit decline. There is a lot of confusion as to who said what with this story, but the bottom line is that it didn’t lead to anything good. This was a big misstep in 2012, but it wasn’t the end of the bad news for Darden Restaurants. In December, the company announced that sales growth for 2013 was expected to come in between 7.5 percent and 8.5 percent. Investors didn’t receive this news well, and the stock plummeted. Now, the question becomes whether or not that has presented an opportunity. Since the stock hasn’t moved much since, the answer would appear to be no. However, we should still investigate a little further.

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If you’re not familiar with Darden Restaurants, it operates Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V’s Prime Seafood, and Wildfish Seafood Grille. There are approximately 2,000 restaurants overall with Olive Garden representing about 45 percent of total sales. Olive Garden is known to be a more affordable option to traditional Italian restaurants, but for one example, their Chicken Parmigiana dinner entrée costs $14.95. That’s very similar to what you will find at the average Italian restaurant. Once diners catch on to this, which they might have begun to do already, it’s not going to be good news for Olive Garden. Traffic has slowed as of late.

Let’s take a look at some important numbers prior to forming an opinion on the stock…