Buy Darden Restaurants for the Value, Ignore the Price

Correction: Corrects in the second paragraph the day Darden reports earnings.

NEW YORK (TheStreet) -- "Price is what you pay. Value is what you get," said Warren Buffett. Price should not be the sole factor when making an investment decision.

That's why, despite shares of specialty dinning operator Darden Restaurants (DRI) being expensive at 37 times earnings, you should own the stock ahead of fiscal fourth-quarter earnings Tuesday based on its value. 

Darden, Orlando, Fla., owner of LongHorn Steakhouse and Olive Garden, has had a good run. Its comparable same-restaurant sales are climbing at all of its restaurants, and the stock, at $69, is up 18% for the year to date and for the last six months.

By comparison, the PowerShares Dynamic Food & Beverage Portfolio (PBJ) has gained 7.7% for the year to date and 6% for the past six months. The exchange-traded fund includes Starbucks (SBUX) and Chipotle Mexican Grill (CMG).

Another reason for the value conscious to buy: Darden pays a 55-cent quarterly dividend, yielding 3.30% annually.

Darden's focus on increasing traffic at its signature restaurant, Olive Garden, is paying off. The company is developing new menu items, simplifying its kitchen operations and revamping the look and appeal of its restaurant to give customers a better experience. Perhaps equally important, Darden has embraced technology by ramping up its online-ordering platform, which could lower overhead costs.

This explains why Darden is projected to grow long-term earnings at an annual rate of 18% in the next five years. Not impressed? Consider, that's just two percentage points slower than Chipotle, whose five-year annual earnings growth rate is projected to be 20%. As Darden's earnings grow, it's also more than likely its dividend will rise, too. 

These factors weren't lost on analysts Brett Levy and Karen Short at Deutsche Bank, who on initiated coverage on DRI shares late last month with a buy rating and setting a 12-month price target of $72, suggesting 7% gains from current levels. DRI was one of only four restaurants among 13 the analysts rated a buy. 

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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