Darden, Texas Roadhouse are restaurant stocks to own in a recession – BofA (NYSE:DRI)


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As recession risks increase, Texas Roadhouse (NASDAQ: TXRH) and Darden restaurants (NYSE: DRI) are restaurants that should remain resilient, according to Bank of America analysts Sara Senatore and Katherine Griffin.

In a research note initiating Inventory coverage on Monday, analysts wrote that strong same-store sales growth is expected in both cases despite a slowdown in consumption. Meanwhile, the margins also appear relatively well defended, according to his analysis. As pent-up demand for full-service restaurants continues to emerge, both stand to benefit.

In particular, Griffin cited Darden’s (DRI) Olive Garden franchise as a big winner in the current market environment.

“Olive Garden ranks number one among FSR chains in the United States in terms of sales,” she noted. “The demand backdrop for Darden is benign if not favorable, in our view, as shifts in industry capacity, revenue and food budgets have tipped in favor of full-service restaurants post-pandemic. Darden is well positioned to capture volume growth in all its forms, whether it comes from offsite channels or pent-up demand for affordable, indulgent dining opportunities.

While Texas Roadhouse (TXRH) is more tied to beef prices and inflationary pressures according to the analysis, its unwavering protection of stable prices should continue to drive traffic.

“The TXRH comps track canned beef prices closely with a 2 qtr lag, reflecting the process of delayed transmission of prices from farm gate to retail shelves and underscores the strong value proposition offered when retail prices are high. “, explained Senatore.

The team rated both Texas Roadhouse (TXRH) and Darden International (DRI) with “Buy” ratings, assigning price targets of $96 and $145, respectively. She said each was among the most attractive names in the restaurant business, especially amid a market downturn to recession that is changing consumer behavior.

For example, earnings per share at Brinker International (EAT) fell 5.3% during the Great Financial Crisis compared to an 8.2% increase at Darden Restaurants (DRI). Stronger operating margins and a stronger balance sheet also make Texas Roadhouse (TXRH) and Darden (DRI) stronger picks than their close counterpart Brinker International (EAT). Operating margins are expected to trend towards 9% at Darden (DRI) and 8.6% at Texas Roadhouse (TXRH), well above the 6% estimated at Brinker (EAT) by Senatore.

Read more about his rationale for a bearish rating on Brinker International (EAT) stock.


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