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Best Restaurant Stock: Darden

Darden Restaurants is a top-ranked company -- and a safe play as consumers scrimp.
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BOSTON (TheStreet) -- Darden Restaurants (DRI) - Get Darden Restaurants, Inc. Report ranks among analysts' favorite restaurant stocks.

But, unlike





(CMG) - Get Chipotle Mexican Grill, Inc. Report

, Darden is a value, rather than growth, stock. Darden owns Olive Garden, Bahama Breeze, Red Lobster, LongHorn Steakhouse, Seasons 52 and high-end steakhouse The Capital Grille. Yesterday, it announced fiscal first-quarter results, beating analysts' earnings consensus by 3%.

Fiscal first-quarter profit gained 20% to $113 million, or 80 cents a share, as revenue grew 4.2% to $1.8 billion, narrowly missing analysts' target. Darden's operating margin climbed from 8.8% to 10%. At the end of the quarter, the company held $78 million of cash and $1.5 billion of debt, a weak liquidity position. Darden's return on equity, a measure of profitability for investors, remained steady at 23%, beating the

S&P 500

quarterly average of 12%.

Olive Garden's quarterly sales gained 6.8%, boosted by 32 new locations. But the chain's same-store sales climbed a more modest 2.3%. Olive Garden is the largest chain, with 727 locations. Second-biggest Red Lobster suffered a sales decline of 0.8% and a same-store sales drop of 1.7%. LongHorn's revenue expanded 6.8% and its same-store sales rose 2.2%. The best-performing segment is also the smallest. Specialty restaurants, encompassing 41 Capital Grille, 25 Bahama Breeze and 11 Seasons 52 locations, boosted sales 12% and same-store sales 2.7%.

Seasons 52 is a new concept that is receiving favorable customer reviews. It focuses on seasonal ingredients, particularly local fruits and vegetables. However, it is still too small to have a material effect on Darden's operating performance, with just 11 locations open to date. Investors shouldn't consider Darden for its expansion prospects, but value, as the company is the world's largest full-service restaurant company. Darden doesn't franchise restaurants domestically, but several international locations are outside corporate control.

Of analysts evaluating Darden, 21, or 75%, rate its stock "buy" and seven rate it "hold." A median price target of $51.05 suggests a return of 19% in the next 12 months.


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expects a rise of 26% to $54 and

Piper Jaffray

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predicts a climb of 23% to $53.

The stock trades at a trailing earnings multiple of 15, a forward earnings multiple of 12, a book value multiple of 3.3, a sales multiple of 0.9 and a cash flow multiple of 6.6 -- 49%, 53%, 45%, 68% and 50% discounts to restaurant industry averages. Its PEG ratio, a measure of value relative to growth, of 0.9, signals a 10% discount to fair value. Darden pays a 32 cent quarterly dividend, equal to an annual yield of 3% and a payout ratio of 38%.

The stock has declined 3.8% since the quarterly release, presenting a buying opportunity.


(BCS) - Get Barclays Plc Report

, which rates Darden "overweight," reacted to the quarterly release by reaffirming that the stock offers the best fundamentals in a "challenged, albeit improving, sector." Barclays offers a target of $51, 15 times its 2011 earnings forecast.

Darden missed Barclays' same-store sales forecasts, but the bank remains bullish because the company exceeded researchers' forecasts for operating, pretax and net margins, solidifying the prospects of cost cutting at the chains. Of the stock's 50 largest institutional shareholders, 29, or 58%, increased their stakes in the latest quarter, 2, or 4%, held steady and 19, or 38%, lessened their holdings. Darden has risen 24% in 2010 and 5.3% in September.

-- Written by Jake Lynch in Boston.


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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.