We’re considering the forward PE (price-to-earnings) multiple for our analysis due to high visibility in Darden Restaurant’s (DRI) earnings. The forward PE multiple is calculated by dividing the company’s stock price by analysts’ earnings estimate for the next four quarters.
Forward PE multiple
Investors expect the devastation caused by Hurricane Harvey and Hurricane Irma in Texas and Florida, where ~20% of Darden’s restaurants are located, to lower the company’s sales in fiscal 1Q18. The fear of lower sales led to a fall in Darden’s stock price and its valuation multiple. As of September 19, 2017, Darden was trading at a forward PE multiple of 18.1x—compared to 20.4x before the announcement of its fiscal 4Q17 earnings.
From the above graph, you can see that Darden is trading above its peers’ median valuation multiple. By focusing on enhancing guests’ experience and investing in improving the quality of its food and service, Darden has been able to achieve positive SSSG (same-store sales growth). As a result, the company traded at higher forward PE multiple than its peers’ median. On the same day, Darden’s peers Brinker International (EAT), Bloomin’ Brands (BLMN), and Texas Roadhouse (TXRH) were trading at 9.8x, 11.5x, and 22.9x, respectively.
For the next four quarters, analysts expect Darden’s EPS to rise 11.2%, which could have already been factored into its current stock price. If the company delivers earnings that are lower than analysts’ expectations, the selling pressure could bring the company’s valuation multiple down.
In the next part, we’ll look at analysts’ recommendations and their target price.