On Thursday, BMO (TSX:BMO) Capital Markets adjusted its outlook for Darden Restaurants, Inc. (NYSE:DRI), increasing the stock's price target from $160.00 to $165.00, while keeping a Market Perform rating on the shares. The revision reflects an anticipation of more favorable near-term food costs, specifically lower beef prices, which has led to a slight increase in the company's third fiscal quarter 2024 earnings per share (EPS) projections.
The firm's analyst pointed out that despite the target increase, the forecast for Darden's comparable store sales (comp) in the third fiscal quarter has been set below the consensus. The report also notes a deceleration in traffic share gains for the restaurant company. The potential shortfall in third fiscal quarter comparable sales presents some immediate risk to the stock, according to the firm.
Darden's shares have not performed as well as other casual dining stocks since the sector reached a low point approximately five months ago, and they have also shown underperformance since the start of the year. However, the firm indicates that the risk/reward profile for Darden's shares seems to be balanced at the moment.
The valuation of Darden Restaurants has expanded to a multiple of 11.5 to 12.0 times the firm's fiscal year 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates. This is compared to the five-year average multiple of 12 times and the three-year pre-COVID average of 11 times, suggesting a shift in investor sentiment regarding the stock's value.
InvestingPro Insights
As BMO Capital Markets revises its price target for Darden Restaurants, Inc. (NYSE:DRI), investors are looking closely at the company’s financial health and market position. According to InvestingPro data, Darden Restaurants has a market capitalization of $21.0 billion, with a P/E ratio sitting at 21.06. This valuation comes as the company shows a revenue growth of 10.3% over the last twelve months as of Q2 2024, indicating a robust increase in sales. This growth is paired with a gross profit margin of 20.84%, showcasing the company's ability to maintain profitability.
An InvestingPro Tip that stands out in the context of BMO's report is Darden's track record of raising its dividend for three consecutive years. This trend aligns with the firm's positive outlook on the company's near-term earnings potential. Moreover, the dividend yield as of the latest data is 2.98%, which could appeal to income-focused investors. It’s worth noting that while the stock is trading near its 52-week high, with a price percentage of 99.47% of that high, InvestingPro Tips also suggest that Darden's stock may be in overbought territory, as indicated by the RSI, and it is trading at a high P/E ratio relative to near-term earnings growth.
For those looking to delve deeper into Darden Restaurants' financials and future outlook, InvestingPro offers additional insights. There are currently 10 more InvestingPro Tips available for Darden Restaurants at https://www.investing.com/pro/DRI. To access these tips and more detailed analysis, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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