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It’s time to Take Darden Stock Off the Menu

Earnings, revenue growth leave a bad taste for investors


Welcome to the Stock of the Day.

Darden Restaurants NYSE:DRIDarden Restaurants (DRI) has given investors heartburn after posting one disappointing earnings report after another. But shares are climbing this morning after the company’s latest earnings release. Could 2014 hold better fortunes for the restaurant operator?

Find out in today’s Stock of the Day.

Company Overview

Many have heard of American restaurant chains Olive Garden, Red Lobster or Longhorn Steakhouse, but few know that they are all owned and operated by Darden Restaurants. Based in Orlando, Florida this company rakes in $8.5 billion in annual sales but a good chunk of those sales go to food and supplies. Darden recently announced that it plans to sell or spin-off its Red Lobster chain, which has been struggling of late.

Earnings Rundown

In the third quarter, Darden Restaurants faced higher costs and expenses, which weighed on the company’s bottom line. Meanwhile, the company reported declining sales at Olive Garden, Red Lobster and LongHorn Steakhouse.

Compared with the same quarter last year, net earnings plunged 23% to $109.7 million, or 82 cents per share. This matched the consensus estimates. Over the same period, quarterly sales ticked down 1.1% to $2.23 billion, but this missed the consensus estimate of $2.25 billion.

Future Outlook

The company also declared a quarterly dividend of 55 cents per share, but not even DRI’s hefty dividend yield of over 4% would get me to buy Darden’s stock, especially given its earnings prospects for this quarter. While the Restaurants industry average is 194% earnings growth in the current quarter, Darden Restaurant’s bottom line is expected to shrink 5.9%.

And Darden could do even worse, considering that analysts have reduced their estimates by a penny over the past three months. I don’t like those odds. Looking ahead to FY 2014, DRI is headed towards a 21.1% year-on-year drop in earnings.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. 2013 was not a good year for Darden Restaurants–the stock has spent much of the year in sell territory. And the story hasn’t changed for 2014. This is due to a one-two punch of poor fundamentals (earning a D-rated Fundamental Grade) and nonexistent institutional buying pressure (D-rated Quantitative Grade).

Our of the eight fundamental metrics I graded Darden stock on, DRI outright fails on five, including operating margin growth, earnings growth and cash flow. The only area where Darden is doing OK is its A-rated return on equity. However, this hasn’t been enough to attract institutional interest, so DRI is still a sell.

Bottom Line: As of this posting I consider Darden stock a D-rated Sell.

Sound Off: What do you think about Darden stock? Are you a buyer at current prices? Let me know what you think by posting on our wall on Facebook. For more stock grades and commentary, please visit!

Article printed from InvestorPlace Media,

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