Standing out among the Street's worst performers today is Darden Restaurants, which announced a whopping 16% drop in profits. The parent company of Olive Garden and other restaurant chains has seen its shares slum -4.2% so far today, trading at a price of $125.76. This is -10.06% below its average analyst target price of $139.83, and the average analyst rating for the stock is buy.
As of the third quarter of 2022, the consumer cyclical sector has an average price to earnings (P/E) ratio of 24.11, and the average for the S&P 500 is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
Darden Restaurants's trailing 12 month P/E ratio is 17.0, based on its trailing Eps of $7.4. The company has a forward P/E ratio of 14.6 according to its forward Eps of $8.6 -- which is an estimate of what its earnings will look like in the next quarter. The problem with P/E ratios is that they doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations. We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 1.94 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not completely justified by its growth levels.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (the company's share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Darden's P/B ratio is 7.1 -- in other words, the market value of the company exceeds its book value by a factor of more than 7, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Cyclical sector, which stands at 3.11 as of the second quarter of 2022.
After today's price drop, Darden is likely fairly valued because it has a lower P/E ratio than the sector average, but elevated P/B and PEG ratios. Even die-hard value investors who are willing to overlook the gloomy outlook shared in today's earnings call won't see much of a reason to snatch up the stock at today's price.
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