Shares of Darden Restaurants (NYSE:DRI) rose as much as 25.6% in Wednesday's trading session, boosted by a bullish analyst report. The parent company of restaurant chains such as Olive Garden, LongHorn Steakhouse, and Cheddar's Scratch Kitchen closed the day at a milder 8.2% gain.
Analyst firm Gordon Haskett upgraded Darden from a "hold" to a "buy." Analyst Jeff Farmer argued that the 55% sell-off in recent weeks is "overdone" in the light of Darden's solid balance sheet and the potential for a strong rebound in same-store sales after the coronavirus crisis.
Farmer was also an active participant in Darden's third-quarter earnings call two weeks ago. There, he sought greater clarity on the financial impact of a full shutdown in case the COVID-19 pandemic ever goes that far. Management explained that the company would burn roughly $45 million of free cash per week under that scenario.
Darden is trading at rock-bottom valuation ratios like 10.7 times trailing earnings and 0.6 times trailing sales. Business will be slow as long as the virus panic limits most of Darden's locations to take-out and delivery services, but I do agree with Farmer's bullish analysis of the company's cash reserves. It would take a total shutdown of at least six to seven weeks to empty out Darden's cash coffers. Even then, the company boasts investment-grade credit ratings and should have no trouble raising more cash from bank loans or senior debt notes.
The analyst-powered jump didn't last long, but this brief sign of life reminded me to take a deeper look at Darden Restaurants. I think this company will make it through the coronavirus crisis, and that makes it a deep-discount value stock right now.