Darden is a sell; valuation is too high relative to performance despite strong sales and returns.

Folks, our final sell recommendation comes from Morning Star regarding Darden, the company that owns upscale restaurant chains like Olive Garden and Longhorn Steakhouse.

Its last quarter was pretty strong, with sales up nearly 14%, and Longhorn was absolutely brilliant, with comparable sales up 9.5 %. Remember, comparable sales are for stores that have been in business for at least a year.

This helps a lot when sales at long-established stores are rising significantly.

Now, quick heads-up: the big jump in sales was fueled by an extra week on the calendar. This happens with companies sometimes. So, why is it on the "avoid" list? Well, remember the lesson learned?

Who's Kava? Same thing here. They think the price has gone way up relative to the company's performance.

Now, the upside is that Darden is huge. The Olive Garden chain alone generates over $5 billion a year. That massive scale gives it cost advantages in food, advertising, and technology that smaller restaurants can't match.

The downside is that full-service restaurants are the first thing families cut back on when budgets are tight. And some of Darden's upscale brands are already slowing down, with fine-dining sales up barely 1% and profit margins shrinking.

So, let's do one last takeaway. Guys, it's a $23 billion company with a $ 33 billion enterprise value . Again, there's roughly $10 billion in debt. And free cash flow is only $1.1 billion a year. So, this company is loaded with debt.

But the return on capital is good, averaging 12% annually over the past five years and 13.5% over the past ten years. Profit margin It's holding steady at 9%. The 10-year average is 8%, but something tells me that the impact of the COVID year has significantly affected that figure.

And guys, they're consuming more than half of their cash flow to pay out $700 million in dividends. They're also trading at around 20 times earnings and free cash flow. So, let's look at the eight pillars.

Okay. Debt levels are high. And the five-year free cash flow rate is also high. Apart from that, they have positive valuations in every other area.

Remember, revenue growth is huge because they recovered from the COVID pandemic five years ago. So, there's been a significant jump in revenue since then . Let's see what the analysts are saying.

Wow, though. I'm actually surprised by this. Earnings are expected to range between $11.30 and $14.40 per share over the next three years.

Revenue growth seems logical, at around 6% annually. Opening new stores and overall sales growth makes perfect sense .

Let's run our stock analysis tool. I have never analyzed "Darden" before. Okay guys, this is my analysis for the last 10 years. It adopted revenue growth rates of 3, 5, and 7%.

Earnings and free cash flows were adopted at rates of 8.5%, 9%, and 9.5%. I used a price-to-earnings ( P/E) ratio of 16, 19, and 22.

I like to see the increasing returns on capital here. They are increasingly better at managing their money. Finally, my target return is 9.5%. Now, before we finish our analysis of Darden, consider SanDisk with its revenues up by 372%.

This is exactly the kind of thing that makes people rush to buy at the wrong price.