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Is the Darden Restaurants Brand Overvalued?

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Mar. 25 2015, Updated 4:35 p.m. ET

Comparables

Darden Restaurants (DRI) competes with several casual dining restaurants, encompassing large and small brands. Some of its closest competitors are Brinker International (EAT), DineEquity (DIN), Bloomin’ Brands (BLMN), and Texas Roadhouse (TXRH).

With so many options for investment, it becomes important to know how Darden Restaurants is trading compared to it competition.

Darden Restaurants has the largest market cap of $7.7 billion among its competition, shown in the above chart. However, market cap does not tell us much about Darden’s value. Let’s look at two common measures for determining Darden’s value in comparison to its competitors.

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Price-to-equity ratio

The average next 12-month PE ratio (or price-to-equity) for the comparables in the above chart is 20.6x, and Darden’s 24.6x is trading well above this average. This forward-looking PE indicates that Darden is overvalued compared to its peers.

Texas Roadhouse also has a PE of 24.4x, which is also high. Brinker International appears to be the most undervalued. Keep in mind that this is not the most accurate measure, because each company is not completely similar to Darden even though they operate within the same industry.

EV/EBITDA ratio

The average next 12-month EV/EBITDA ratio (or enterprise value to earnings before interest, tax, depreciation, and amortization) for the comparables in the above chart is 10.3x. Once again, Darden is above this average at 11.3x. The lower ratio indicates that a company is undervalued.

Investors can attain exposure to Darden Restaurants through the Consumer Discretionary Select Sector SPDR ETF (XLY), which holds about 0.3% of its assets in Darden Restaurants.

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