One Analyst Loses His Appetite For Darden Restaurants

Citing the vulnerability of Darden Restaurants, Inc. DRI to weak conditions in the casual-dining industry, Argus downgraded shares of the company. This is despite the firm having a favorable view of the company's strong brands, everyday value menu and high customer satisfaction ratings.

As such, the firm downgraded its rating on Darden shares from Buy to Hold.

Only recently, Baird upgraded Darden, citing the pullback over the past three months, which provided an attractive entry point.

Argus analyst John Staszak said the company needs to circumvent the weakness arising out of the slowing takeout orders in the Olive Garden by focusing on in-store restaurant sales to drive comps higher.

That said, the analyst expects the company's outperformance, relative to other casual dining companies to diminish in the coming quarters, given the softness in the Olive Garden takeout business, and in the absence of offsetting gains at the company's other chains.

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Instead, Argus recommends investors interested in restaurant stocks to look at its Buy-rated McDonald's Corporation MCD.

Notwithstanding the downgrade of Darden, the firm said the company remains a Buy long term, as it believes share buybacks, unit expansion and further cost reduction will lead to EPS growth over time.

"We also believe that Darden remains among the best-managed casual dining companies in our coverage group," the firm said.

Argus lowered its 2018 earnings per share estimate for Darden from $4.56 to $4.44 and its 2019 estimate from $4.99 to $4.80.

On a long-term basis, the firm estimates earnings growth of 11 percent.

"Given prospects for slower comp growth at the company's core and specialty restaurant chains, we believe that DRI shares are fairly valued at 18.0-times our revised FY18 EPS estimate," the firm said of the valuation.