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Darden Restaurants, Inc. (DRI), Cracker Barrel Old Country Store, Inc. (CBRL): There’s Usually Something for Everyone in Restaurant Stocks

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The restaurant sector is fascinating to follow. There are usually plenty of interesting stories and even an occasional bargain stock to be found. Plus, the basics of the industry are fairly simple to understand; offer a good product, at a fair price, in an attractive setting with acceptable service. But as simple as it sounds, success in the sector never ends up being that easy. Here are three restaurant stocks I follow that could be of interest to differing types of investors:

This industry giant produces steady income

Darden Restaurants, Inc. (NYSE:DRI), the world’s largest full-service restaurant company, owns and operates more than 2,100 locations. Its stock has fluctuated between $41 and $57 over the last couple of years, mainly due to an alternating pattern of disappointing results followed by surpassed expectations. But as variable as the stock has been, the company has consistently delivered free cash flow and paid a substantial dividend.

In its most recent quarter, Darden Restaurants, Inc. (NYSE:DRI) didn’t seem to impress. Earnings from continuing operations came in at $133.3 million versus $151.6 million the prior year, though sales were up 11.3% to $2.30 billion, thanks to decent same-restaurant sales growth of around 2.2% and over 140 net new sites.

Darden Restaurants, Inc. (NYSE:DRI)To maintain sales momentum, Darden Restaurants, Inc. (NYSE:DRI) is focusing on boosting traffic through more affordable pricing. It wants to match competitive promotions while maintaining low menu prices. To help offset the resulting pressure on profits, the company is looking to expand. One area targeted for growth is Latin America. Darden recently announced deals with two renowned restaurant operators to establish a presence in six Latin American countries. This comes on top of a February agreement to enter four other countries in the region and previous deals for expansion in Puerto Rico and Mexico.

Darden Restaurants, Inc. (NYSE:DRI)’s stock currently looks reasonably priced. Using a cash earnings times a capitalization multiplier valuation, the company’s fair business value looks around $49 a share based on an industry average multiple of 12 times, with estimated sales of $9.14 billion and $526 million in cash earnings at a 5.8% profit margin.

This eatery has cooked up plenty of momentum

Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) operates 622 company-owned sites in 42 states. Each location holds a restaurant and store where guests can enjoy home-style food and shopping that’s reminiscent of America’s country heritage.

The company’s shares have certainly been on a roll, more than doubling over the last couple of years. Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) first drew my attention in the fall of 2011 when it implemented a shareholder rights plan, or poison pill, to dissuade activist investor Sardar Biglari. Earlier, Biglari had announced a 9% stake in the company and quickly gained antitrust approval to acquire up to 49.99%. Though he has always maintained that his buys were for “investment purposes only,” he has upped his stake to 19.99% and has been a thorn in the company’s side by continually trying to get board representation.

Whether it was due to pressure applied by Biglari or just coincidence, Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) management has certainly increased its focus on improving results. In its latest earnings report, comparable store restaurant sales increased a fine 3.1% and comparable store retail sales increased a hefty 5.5%. The sixth consecutive quarter of positive comparable restaurant and retail sales. Profitability also improved with operating income margin moving up to 6.9% of sales, versus 6.4% in the prior year. Earnings came in at $1.02 a share, a 26% jump compared to a year earlier.

It looks like Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) Barrel’s current stock price may have already discounted these and future gains, however. Based on expected revenue of $2.64 billion and $133 million in earnings at a 5% profit margin, fair value looks around $78 a share using an optimistic multiple of 14 times.

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