Valuation multiples help investors compare companies with similar business models. Due to the high visibility in Darden Restaurants’ (DRI) future earnings, we’ve opted for the forward PE (price-to-earnings) multiple. The forward PE multiple is calculated by dividing the company’s stock price from analysts’ earnings estimates for the next four quarters.
Darden’s forward PE multiple
The lower-than-expected fiscal 3Q18 SSSG (same-store sales growth) and revenue, the announcement by Darden’s management of not offering its most popular promotion, Buy One Take One, in fiscal 4Q18, and weakness in broader equity market appear to have led to a fall in Darden’s stock price and valuation multiple. As of March 22, Darden was trading at a forward PE multiple of 16.3x, compared to 17.7x before the announcement of the fiscal 3Q18 earnings.
On the same day, Darden’s peers Texas Roadhouse (TXRH), Brinker International (EAT), and Bloomin’ Brands (BLMN) were trading at a forward PE multiple of 23.7x, 9.5x, and 16.6x, respectively. The recent decline has led Darden’s valuation multiple to fall below peers’ median value.
For the next four quarters, analysts expect Darden’s EPS to rise 13.4%, which could have already been cooked into the company’s current stock price. If the company posts earnings lower than analysts’ expectations, the selling pressure could bring the company’s stock price and valuation multiple down.
Next, we’ll look at analysts’ recommendations.