UBS maintains Buy for Darden Restaurants stock after Chuy’s acquisition By Investing.com

On Friday, UBS reaffirmed its positive stance on Darden Restaurants, Inc. (NYSE:) stock, maintaining a Buy rating and a $188.00 price target. The endorsement follows Darden’s latest strategic move to expand its portfolio by acquiring Chuy’s, a chain of full-service Tex-Mex restaurants. This acquisition marks Darden’s second in the past year and will increase its brand count to ten.

Darden is set to complete the acquisition by the second fiscal quarter of 2025. Chuy’s operates 101 restaurants across 15 states, with more than $450 million in revenue over the last twelve months.

The chain has shown consistent growth, with a 3% increase in 2023 and a projected 6% increase in 2024, according to Consensus forecasts. Darden’s purchase price of $605 million translates to a 10.3 times last twelve months EBITDA, which drops to 8.2 times when accounting for the targeted synergies.

The transaction is expected to bring about $15 million in pre-tax net synergies by the end of fiscal year 2026, with a neutral impact on fiscal year 2025 earnings per share, excluding merger and acquisition expenses estimated between $50 and $55 million. By fiscal year 2027, the synergies are anticipated to enhance earnings per share by approximately $0.12 to $0.15, roughly a 1% increase.

Following the deal, Darden aims to maintain its leverage within the targeted range of 2.0 to 2.5 times, positioning the company on the lower end of this spectrum post-acquisition. Initial responses from investors have been mixed, with some expressing concerns over the size of the contribution to Darden’s business, the purchase price, and the focus on current challenges facing Darden’s core operations.

In other recent news, Darden Restaurants announced a significant acquisition of Chuy’s Holdings (NASDAQ:) for $605 million, a move that will add Chuy’s 101 restaurants across 15 states to Darden’s extensive portfolio. The acquisition is expected to be neutral to Darden’s earnings per share for the fiscal year 2025. It’s important to note that the company has the necessary liquidity to fund this all-cash transaction.

Despite Darden’s strategic acquisition, Jefferies has downgraded Darden’s stock from Hold to Underperform, reflecting concerns about the company’s near-term fundamentals. The downgrade is attributed to potential market share loss and diminishing benefits from the pandemic’s impact on industry capacity.

On the earnings front, Darden reported an 8.6% increase in total sales to $11.4 billion for fiscal year 2024, surpassing expectations. The company also reported an adjusted diluted net earnings per share of $8.88. Looking ahead to fiscal year 2025, Darden’s guidance includes a same-restaurant sales growth of 1% to 2% and a total sales growth driven by same restaurant sales and new restaurant growth.

In other company news, Darden has undergone leadership changes to further enhance its brand positioning. The company’s success in the past year is attributed to effective cost management and the successful integration of Ruth’s Chris Steak House. However, Olive Garden, one of Darden’s brands, experienced negative same restaurant sales despite outperforming industry benchmarks in guest counts.

InvestingPro Insights

In light of UBS’s reaffirmed Buy rating on Darden Restaurants, Inc., it’s pertinent to consider additional financial metrics and analyst sentiments from InvestingPro. Darden, with a market capitalization of $17.05 billion, trades at a P/E ratio of 16.58, reflecting a market assessment of its earnings. Despite concerns about its core operations, Darden has exhibited resilience, maintaining dividend payments for 30 consecutive years and raising its dividend for the past three years, signaling confidence in its financial stability.

InvestingPro Tips suggest caution, noting that 15 analysts have revised their earnings expectations downwards for the upcoming period, and the company is trading at a high P/E ratio relative to near-term earnings growth. Additionally, the stock is trading near its 52-week low, which could indicate a potential value opportunity or a sign of underlying challenges. For investors looking to delve deeper into Darden’s financials and future outlook, InvestingPro offers further tips and insights. Use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, and access the 10 additional InvestingPro Tips available for Darden Restaurants, Inc.

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