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Darden Restaurants (DRI) downgraded at Baird despite positive outlook

November 29, 2022 11:28 AM EST
Get Alerts DRI Hot Sheet
Price: $148.37 --0%

Rating Summary:
    28 Buy, 15 Hold, 1 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 13 | Down: 20 | New: 9
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Darden Restaurants (NYSE: DRI) was downgraded to Neutral from Outperform, with the price target raised to $150 from $134 at Baird in a note on Tuesday.

Analyst David E. Tarantino told investors that the firm still has a very positive view of the company's internal operating fundamentals and believes it is on track to deliver good results in FQ2-FQ3.

However, he added that when factoring in the year-to-date outperformance for the shares and the lingering risks related to the macro outlook, they believe the risk/reward has become more balanced at the current valuation metric.

"DRI shares have returned +1% to date in 2022 (including dividends) vs. -16% for the S&P 500. The NTM P/E of 18.4X is now roughly consistent with the average for 2018-2019 (years preceding the pandemic), and the current premium to the S&P 500 of 6% also is close to historical levels. While we remain constructive on the longer-term fundamental outlook for the company, we simply think the multiples being applied to the shares more fairly balance the key positives of the DRI story (e.g., well-positioned brands, scale advantages, appealing growth profile) with the near-term risks related to the casual dining industry backdrop," wrote Tarantino.

"Although casual dining industry sales have held up reasonably well in recent months and are likely to remain positive in DRI's FQ3 (lapping year-ago omicron disruptions), the key variables that have correlated well to casual dining industry traffic historically (e.g., consumer confidence, housing market conditions) have turned unfavorable and are signaling an industry slowdown in calendar 2023, and we fear the outlook could worsen if tighter monetary policy ultimately leads to weaker employment conditions," he added. "While we would consider Darden relatively well positioned to navigate a slower economy, we highlight risk that tougher macro conditions could cause revenue trends to lag current model assumptions for FQ4/F2024, potentially creating some risk to earnings estimates (with reduced input cost inflation possibly an offset)."

By Sam Boughedda



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