TSC Ratings' Updates: Darden Restaurants

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

The following ratings changes were generated on Wednesday, April 15.

We've downgraded Commerce Bancshares(CBSH Quote), which provides various banking services to individuals and businesses, from buy to hold. Strengths include the company's expanding profit margins and notable return on equity. However, we also find weaknesses including a decline in the stock price during the past year, feeble growth in the company's earnings per share and premium valuation.

Commerce's gross profit margin of 69.4% has decreased from the same period last year. Revenue fell by 15.9%. EPS also declined, and we expect the company's two-year pattern of declining EPS to continue in the coming year. Return on equity fell slightly from the year-ago quarter, implying a minor weakness in the organization.

Shares are down 12.6% over the past year, in part reflecting the market's overall decline, which was actually deeper. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. It was down over the last 12 months, and it could be down again in the next 12. Naturally, a bull or bear market could sway the movement of this stock.

We've upgraded restaurant chain operator Darden Restaurants(DRI Quote) from hold to buy, driven by its attractive valuation levels, solid stock price performance and good cash flow from operations. We feel these strengths outweigh the fact that the company has had generally poor debt management on most measures that we evaluated.

EPS are down slightly compared with the year-earlier quarter, but we feel that Darden is poised for EPS growth in the coming year. Net operating cash flow increased 6% to $334 million compared with the year-ago quarter, while revenue dropped 0.7%. Shares are higher than they were a year ago, outperforming the S&P 500 over the same timer period. It goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.