Investor Optimism Abounds Darden Restaurants, Inc. (NYSE:DRI) But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 20.6x Darden Restaurants, Inc. (NYSE:DRI) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 11x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Darden Restaurants certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Darden Restaurants

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Darden Restaurants.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Darden Restaurants would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a decent 5.6% gain to the company's bottom line. EPS has also lifted 26% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 12% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 11% growth each year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Darden Restaurants is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Darden Restaurants currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Darden Restaurants has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Darden Restaurants. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.