Will Darden Restaurants, Inc. Surge 35% to $115?

Darden Restaurants, Inc. (NYSE:DRI) has not been trading very well lately. DRI stock is now down 10% over the past month and over 12% so far in 2018. But will that ultimately mark the low? Are shares heading to $115?

If DRI stock does rally to that point — the Street-high price target held by Canaccord analyst Lynne Collier — it would represent a near-35% rally. The chart suggests that won’t be the case, while the fundamentals press us to ask, “why isn’t it there now?”

Let’s take a closer look, starting with the fundamentals.

Valuing Darden

Analysts expect DRI stock to earn $4.78 per share in 2018, an 18.9% increase from last year. In 2019, they’re looking for another year of double-digit earnings growth, with expectations calling for 13% growth. On the revenue front, they expect growth of 12.5% in 2018 and 4.6% in 2019.

Given the retail environment we’re in now, these are very solid numbers. So what are we paying for this growth? Surprisingly, DRI stock trades at 17.8 times 2018 earnings and just 15.7 times 2019 estimates. Sub-16 times forward earnings for double-digit growth is pretty reasonable. Especially when you consider that DRI stock pays out a 2.95% dividend yield.

Profit margins of about 7% are improving, although operating margins have fallen about 100 basis points over the past year. Another pro/con? Operating cash flow continues to head higher, while free-cash flow has been declining, albeit slightly, over the past twelve months.

However, its EBITDA has been surging, up more than 40% since July 2015.

In a nutshell, we have some pros and cons when it comes to cash flow and margins, but all things considered, they’re pretty good. EBITDA, earnings and revenue are all growing at a healthy clip, the stock pays a solid dividend and shares are reasonably priced.

Trading DRI Stock

That would make the stock’s recent selloff seem a bit overdone, no?

Unfortunately, the charts are more than discouraging. DRI stock has been trending higher for several years, building out a nice trend beginning in October 2016. That trend line (in black) has been support for 18 months, but a few days ago it gave way.

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