A Board Member Bought Almost $500,000 Worth of Darden

According to a filing with the SEC, William Lewis Jr., who serves on the Board of Directors at Darden Restaurants, Inc. (NYSE:DRI), purchased 11,000 shares of the stock on January 11th at an average price of $44.91 per share. This gives Lewis almost 51,000 shares of Darden total in his direct holdings, so this buy is a substantial percentage increase. Darden is a table service restaurant company whose brands include Olive Garden, Red Lobster, LongHorn Steakhouse, and Capital Grille.

Insider purchases generally aren’t rational from a pure economic perspective: the insider is already tied to the company’s prospects, and the principles of diversification suggest that he or she should avoid buying more shares. This is why we like to track insider purchases: while they don’t always result in gains, they do on average (read more about studies on insider trading) and we think that this is because buying signifies confidence in the stock. There were significant insider sales at Darden Restaurants, Inc. last September and October, but at that time the stock price was over $55. See a history of insider purchases and sales at Darden.

RENAISSANCE TECHNOLOGIES

The second quarter of Darden’s fiscal year ended in November. Revenue was up 7% from the same period in the previous fiscal year, though this was entirely due to the addition of new locations (both organically and from the Yard House acquisition); same-restaurant sales actually fell 3%. In turn, same-restaurant sales fell due to guest counts with increased check size partially offsetting that metric. There was considerable growth in expenses as well: gross margins were essentially unchanged, with higher SGA expenses resulting in the company reporting 26 cents per share in earnings, down from 41 cents per share a year earlier.

Darden Restaurants, Inc. now trades at 13 times trailing earnings, suggesting that the market expects very little earnings growth going forward. As we’ve seen, the recent performance has not been good and it’s particularly troubling to see lower same-restaurant sales in a period when the U.S. economy has been doing fairly well and many other restaurants are experiencing rapid growth. Darden does pay a high dividend yield, at 4.5% at current prices. As a result it might be an attractive target for income investors. Renaissance Technologies, founded by billionaire Jim Simons, initiated a small position in the stock during the third quarter of 2012 (check out Simons’s stock picks).

How does Darden stack up against other restaurant stocks?

Other table service restaurants include Applebee’s and IHOP owner DineEquity Inc (NYSE:DIN), Chilis owner Brinker International, Inc. (NYSE:EAT), The Cheesecake Factory Incorporated (NASDAQ:CAKE), and Texas Roadhouse Inc (NASDAQ:TXRH). The latter three have trailing earnings multiples in the 17-18 range, representing a substantial premium to where Darden trades. However, each of the three has been reporting rises in both revenue and earnings, with both being above 10% in the case of Texas Roadhouse. As a result there is a case to be made that these stocks are better values, and it’s certainly interesting to see a combination of earnings growth and a trailing P/E in the teens. Brinker also made our list of the ten most popular restaurant stocks among hedge funds in the third quarter of 2012 (see the rest of the top ten). Investors might want to learn more about them as a result. DineEquity trades at 16 times analyst consensus for 2013, and the company’s revenue has been in decline. 10% of the company’s outstanding shares are held short; we think it might be better to pass on DineEquity in favor of the other restaurants we’ve discussed.

It’s possible that the market has overreacted to Darden’s poor quarter, and that is likely what Lewis thinks has happened. The stock is cheap enough that the company could be a good value if it stabilizes, but we think that Brinker, the Cheesecake Factory, and Texas Roadhouse might be more reliable bets. They are more expensive, but the recent financial performance of these restaurants has been quite good.

Disclosure: I own no shares of any stock mentioned in this article.

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