Darden Restaurants (DRI) Is Prevailing in the Great American Food Fight - TheStreet

Stick a fork in McDonald's.

Rising consumer sentiment and wages are prompting Americans to eat out more often, but they are increasingly tired of the usual burger-and-fries fare.

Instead, check out Darden Restaurants (DRI) - Get Report , one of the most promising fast-casual restaurant chains, even though the name may not be familiar to many investors. 

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But Darden Restaurants, based in Orlando, Fla., owns and operates 1,536 restaurants in Canada and the U.S. The company's well-known restaurant chains include Bahama Breeze, Eddie V's, LongHorn Steakhouse, Olive Garden, Seasons 52, The Capital Grille and Yard House.

Compared with its peers, this stock boasts a cheaper valuation as well as higher one-year projected capital appreciation. It also throws off a juicy dividend, which is something to covet in this low-yield world.

As they become more health conscious, consumers are increasingly less inclined to visit McDonald's, the grandfather of fast food. After decades of the same fast-food experience, they are eager for a new but still inexpensive ambience that is also healthier.

They are opting instead for fast-casual eateries that occupy a middle ground between fancy restaurants and drive-through joints.

This fast-growing trend had been fueling the rise of Tex-Mex chain Chipotle Mexican Grill, until food poisoning incidents knocked the stock off its perch. Shares of the once high-flying stock are down more than 12% this year, compared with a gain of 6.99% for the S&P 500.

Hipster millennials once flocked to Chipotle Mexican Grill, but E.coli contamination took the shine off the restaurant's burritos and tacos.

But Darden Restaurants is scheduled to report third-quarter operating results on Tuesday, and analysts expect robust year-over-year gains.

In the financial media's coverage of the "fast-food wars," Darden Restaurants gets little attention, which is good news for investors because the stock is undervalued, despite its industry-beating growth prospects and reliably high income.

Despite a corporate earnings season that is expected to be weak, Darden Restaurants is on a long-term path for earnings growth momentum.

The average analyst expectation is that third-quarter earnings will come in at 82 cents a share, compared with 68 cents a share a year earlier. Fourth-quarter earnings are pegged at 64 cents a share, compared with 54 cents a year earlier.

For the full year, earnings are expected to reach $3.87 a share, compared with $3.53 in 2015. The company is projected to report earnings of $4.27 a share next year.

In an industry cursed by sameness, Darden Restaurants has carved out its own niche. The company's restaurants are full-service but not fancy, putting them a peg higher than fast casual and making them a comfortable zone for a typical family that wants a night out.

The company also has embraced the trend toward healthier eating by removing trans-fats and other unhealthy ingredients from its menus.

One of the best ways to reap profits over the long term is to invest in companies that are riding entrenched, popular trends. With a bevy of familiar fast-casual restaurant logos under one corporate umbrella, Darden Restaurants fits the bill.

With a trailing 12-month price-earnings ratio of 20.97, Darden Restaurants is cheaper than Chipotle Mexican Grill (60.65), Dunkin' Brands (39.03), McDonald's (22.04) and Yum! Brands.

Darden Restaurants stock is trading above $61 apiece. The average analyst one-year target for the stock is $69.04, which would represent a gain of about 14%.

The company's expected capital appreciation compares quite favorably with the projected one-year performance of its rivals: Chipotle Mexican Grill (up 2.5%), Dunkin' Brands (down 5.5%), McDonald's (up 12%) and Yum! Brands (up 2%).

A dividend yield of 3.66% sweetens the stock, making it a three-course offering of double-digit growth, bargain valuation and robust income.


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John Persinos is an editorial manager and investment analyst at Investing Daily.

At the time of publication, he owned none of the stocks mentioned.

Persinos appears as a regular commentator on the financial television show Small Cap NationFollow him on Twitter.