Valuation

Darden has earned $3.73 per share over the last four quarters. The stock currently trades at $45.41 per share. So investors who buy today are getting an initial earnings yield of 8.2% ($3.73 / $45.41). This means that if the company were to continue earning $3.73 per share forever, investors would get an annualized return of about 8.2%.

However, management thinks the company will grow EPS by at least 10% annually for the foreseeable future. EPS growth is expected to come through a combination of sales growth, improving margins, and share repurchases.

Assuming the P/E multiple remains the same in the future, you can just add the EPS growth rate to your initial yield to get a ballpark estimate of you annualized return. So, if we think management will hit its target, we can add 8.2% + 10% to get an annual return of 18.2%.

I always want at least a 10% annual return on the stocks I buy, plus a wide margin of safety. This back-of-the envelope math makes Darden look like it might return over 10%. However, investors should always do their own research and not let management tell them what the value of the company is.

The article Casual Dining Is About to Get Hot Again originally appeared on Fool.com.

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