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December 29, 2009 – Comments (2) | RELATED TICKERS: DRI

They own Red Lobster, Olive Garden, Longhorn Steakhouse, The Capital Grille, Bahama Breeze, and Seasons 52. In fiscal 2009 they had sales in excess of $7 billion, an almost 10% increase over fiscal 2008, and earned over $4 per share. They are Darden Restaurants, Inc. (NYSE: DRI).

Financial information contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending May 31, 2009, as filed with the Securities and Exchange Commission on July 24, 2009, and as amended on November 11, 2009.

Short-Term Investment
Based on a recent close of $35.93, there is an approximate 15% upside to first resistance as compared to an approximate 5% downside to first support. While we are not traders, based on the trading range that the stock has been in over the past nine months, a short-term trade with very tight stops may not be a bad play at this point.

Long-Term Investment
We believe that a reasonable value estimate for the stock is in the $64 range, and would add the stock to our portfolio at something less than $21. Why the large margin of safety?

At issue for us is the company's current ratio of 0.5, the company's quick ratio of 0.09, and the company's cash ratio of 0.06.

In addition, we note that almost 20% of the company's total assets consist of goodwill and intangibles, and that the company's total debt is just above $1.8 billion. Not very impressive.

Another of the factors considered in determining an entry point for this stock is what we consider management ineptitude. During fiscal 2009 for every dollar management approved for
debt reduction, they approved $4.35 to buy back company stock. We think such decisions shows extremely poor fudiciary judgement on the part of management.

Considering that the company's net operating income before taxes was just above 11%, we simply don't see how management intends to address the company's debt, debt that was reduced by slightly more than 1% year over year.

Lastly, we note that the company ended fiscal 2009 with an equity value of $23.26, tangible book value of $4.51, and shareholder equity of $11.44, all of which tend to reinforce our need for a large margin of safety.

So while we may enjoy spending a few bucks in the restaurants the company owns, we think an investment in the stock of the company at current price levels will only lead to dysentery.

Wax

For the Darden Restaurants worksheet, please click here.

 

2 Comments – Post Your Own

#1) On December 29, 2009 at 9:12 AM, hrc777 (< 20) wrote:

Hi wax, thanks for the post.  Couple questions.

The year end statements have fully diluted at $2.65 fy 09.  Dont see the $4.00+ unless you are referring to ebit?

Margin of safety price seems right even using $2.65

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#2) On December 29, 2009 at 8:28 PM, wax (97.07) wrote:

hrc;

The $2.65 is correct at face value. But when I determine earnings, what I am interested in is how much a company earns from its operations. In the case of DRI, you have to add in to the $2.65, $1.91 for depreciation that was deducted. When you do that, the adjusted earnings using your $2.65 come to $4.56.

The other thing I use is the total number of diluted shares, which in the case of DRI is 140.4 million, whereas many places use the total shares outstanding which for DRI is 139.3 million.

When you make the share adjustments and also adjust for special income charges of about $0.09, you get pretty close the $4.17 I have listed on the worksheet.

I'm sorry the link seems to be broken, try clicking here.  Also, to look at the financial statements on the web instead going to the SEC site, try clicking here.

Hope this answers your questions.

Wax

 

 

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