Why Darden Restaurants (DRI) Stock Is Lower This Morning

NEW YORK (TheStreet) -- Shares of Darden Restaurants Inc. (DRI) are down slightly in pre-market trade after the company announced this morning that it entered into a definitive agreement to sell its Red Lobster business and certain other related assets and assumed liabilities to Golden Gate Capital for $2.1 billion in cash.

However, activist investors Starboard Value LP and Barington Capital Group LP want Darden to undergo a much more significant breakup, the Wall Street Journal said.

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"We rate DARDEN RESTAURANTS INC (DRI) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. Among the primary strengths of the company is its reasonable valuation levels, considering its current price compared to earnings, book value and other measures. We feel these strengths outweigh the fact that the company has had somewhat weak growth in earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 3.8%. Since the same quarter one year prior, revenues slightly dropped by 1.1%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, DRI has underperformed the S&P 500 Index, declining 7.38% from its price level of one year ago. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market on the basis of return on equity, DARDEN RESTAURANTS INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
  • Net operating cash flow has decreased to $363.70 million or 13.87% when compared to the same quarter last year. Despite a decrease in cash flow of 13.87%, DARDEN RESTAURANTS INC is in line with the industry average cash flow growth rate of -22.05%.
  • You can view the full analysis from the report here: DRI Ratings Report

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