For Darden Investors, It’s Bon Appetit; What’s Not to Like at Citigroup?
Darden Restaurants (DRI) *
Mike (Buy)
Jim (Buy)
Mike: I have to admit, Jim, that I’ve never been in a Darden’s restaurant.
Jim: Isn’t there one in your neighborhood? Actually, Darden Restaurants is a holding company for two chains that are familiar: Olive Garden and Red Lobster.
My view, Mike, is that the only thing harder than running a restaurant is picking a restaurant stock that makes any money in the long run. But I’m going to start with my entree first, and say I like this stock. Uh, why are you looking at me as though you have indigestion?
Mike: Geez, I haven’t even gotten through my shrimp boat yet and you’ve destroyed all the suspense. Fine, I like Darden, too. Now, what many people might not remember is that in 1995 Darden was spun off from General Mills, which had a fair amount of trouble keeping these outfits operating well.
Jim: It’s a familiar tale--just ask PepsiCo.
Mike: Point taken. Look, when you run a restaurant chain that has more than 1,100 outlets, as Darden does, you can’t take your eye off the ball for a second or your restaurants start breeding cockroaches and coming up with rat parts in the salad fixings. They start getting old and rundown, or their theme becomes threadbare. And the next thing you know people are skipping your Olive Garden to take another look at the Sizzler down the street.
Jim: But that’s not happening with Darden, which is executing quite nicely. Darden, incidentally, is named after one William Darden, who started Red Lobster in 1968.
Mike: Right, there are restaurant companies and there are restaurant companies. Unfortunately, Wall Street lumps them together in three major categories: There’s the fast-food category . . .
Jim: McDonald’s, Wendy’s and so forth.
Mike: That’s the low end. At the high end, there are the great flare-outs of recent history known as high-concept restaurants, such as Planet Hollywood. The salient line about Planet Hollywood was that its “price/quality formula” was out of whack.
Jim: Meaning they overcharged you for lousy food.
Mike: The result is that you can now buy one share of Planet Hollywood for less than it costs you to buy a Coca-Cola at Planet Hollywood.
Jim: And right smack in the middle of these categories is . . .
Mike: The casual-dining category, with Darden Restaurants and others like it. They operate sit-down restaurants that don’t serve fast food but aren’t exactly the Four Seasons, either. The formula here is quality at reasonable prices.
Jim: So you walk out feeling as if you got what you paid for.
Mike: Also, one of Darden’s insights that I like is to place a design element in the center of many of its restaurants--one that brings in a lot of profit.
Jim: What’s that?
Mike: A bar.
Jim: Now how would you know that?
Mike: I read it somewhere. Anyway, the training program at Olive Garden, I believe, now includes teaching the kids who are waiters and waitresses how to pronounce the names of the wines they stock. I imagine they had a hard time moving wines that the help kept calling “peanut noirs.”
Jim: Darden also has done a good job delineating its chains in terms of the food they serve. Olive Garden has the Italian theme, Red Lobster is seafood, and Darden has two newer chains that also are distinct. One is called Bahama Breeze . . .
Mike: This is a Caribbean-themed restaurant.
Jim: And you can find one in Oklahoma City, by the way.
Mike: If Bahama Breeze does as well as, say, Olive Garden, maybe the play is not to buy Darden stock but to corner the tarragon market. Meanwhile, Darden’s other new chain is competing in a ubiquitous category known as the barbecue pit.
Jim: Right, the chain is called Smokey Bones BBQ.
Mike: This is a barbecue-and-sports bar, so I guess you can order your baby backs and have 40 baseball and basketball games blaring at you at the same time. But it’s a popular formula.
Jim: Here’s the point: Darden delivers, and even Wall Street is finally taking notice. For the last 11 quarters this company’s earnings have beaten Wall Street’s forecasts every time. Heck, there are a lot of companies in Silicon Valley that can’t say that.
Mike: Then there is Darden’s same-store sales growth, which measures growth at restaurants open at least a year. Last week, Darden said Olive Garden posted a same-store sales gain of 7% to 8% for October, compared with a year earlier, while Red Lobster’s same-store sales rose between 11% and 12%. Those are very strong numbers and a good sign for the stock.
Jim: In fact, Darden’s stock has jumped 74% since March 1. And over the last five years it has far outpaced the Standard & Poor’s restaurant stock index. Even so, Darden now trades for only about 15 times its expected per-share earnings for this year. So it’s attractively priced.
Mike: Plus there’s this apparent cultural shift in which fewer and fewer people are cooking at home.
Jim: Oh, there’s nothing apparent about it.
Mike: You mean it’s true that we’re a nation of lazy slobs who won’t lift a skillet?
Jim: Especially on Friday. I swear, nobody turns on a stove on Friday nights.
The point being that consumer demand for restaurant meals is hotter than ever, which also bodes well for a high-quality company such as Darden--and its stock.
Citigroup (C)
Mike (Buy)
Jim (Buy)
Mike: Our second stock today is one of the bigs on Wall Street.
Jim: They don’t get much bigger than Citigroup: The total assets of this company are approaching $800 billion.
Mike: Yet Citigroup and its stock haven’t gotten much respect lately.
Jim: Which is odd, I think. Citigroup isn’t just huge, it’s the nation’s largest financial services company. It was created by the 1998 merger between insurance titan Travelers Group, which was run by the irrepressible Sandy Weill, and Citicorp, the gigantic banking company that was run by the equally celebrated John Reed.
Mike: And where is Mr. Reed now?
Jim: Not at Citigroup.
Mike: Right. Weill is one of the great Wall Street fighters, and it wasn’t long before he ushered his co-chairman, Reed, out the door. So Sandy has been heading Citigroup by himself since last spring.
Jim: Yes, and when they split there was a wonderful quote in one newspaper in which someone said Sandy Weill “needs to run Citigroup like you and I need to breathe.”
Anyway, Citigroup owns not only Citibank and Travelers, but also the big brokerage Salomon Smith Barney. And it’s about to buy Associates First Capital, a major credit card and consumer finance outfit.
Mike: Now, my position on Citigroup is “in for a penny, in for a pound”--meaning that because we like the stocks of most of the big banks, what’s not to like about Citigroup?
Jim: Agreed. I like Citigroup because it’s in all the major areas of financial services, it’s well-run and it’s exceptionally profitable. Its stock also has done very well--it has gained about 33% over the last 12 months.
Yet some analysts on Wall Street think the stock doesn’t have much higher to go, to which I take umbrage.
Mike: You take umbrage?
Jim: Yes I do.
Mike: You mean you’re personally insulted? Jim, you shouldn’t take these things to heart. They’re all perfectly nice people, I’m sure. However I, too, disagree with them. I think there’s a lot of upside in Citigroup, as in stocks of other big banks, in good part because if the economy slows, as many expect, that will bring down interest rates and improve the spreads at Citigroup.
Jim: The spreads being?
Mike: The difference between the cost at which Citigroup gets money in and the cost at which it lends that money out. As prevailing interest rates come down, it’s an opportunity for Citigroup to widen its spreads--and boost its bottom line--because loan rates typically don’t fall as fast as big banks’ cost of money.
Jim: This company is already a huge money maker. In the third quarter, Citigroup’s net income shot up 27% from a year earlier. And its return on equity--that is, its profit as a percentage of the investment stockholders have in the company--rose again, to 24%. These are all good numbers.
Mike: Yet the stock slumped from early September to mid-October, though it has come back up in recent weeks. I suspect one reason Wall Street has soured on the stock is Salomon Smith Barney. Brokerage companies’ bottom lines tend to be volatile, because you never know what’s going to happen next in the financial markets. But Salomon Smith Barney’s record in the last two years, when the markets have been volatile indeed, shows it to be a well-run operation regardless.
Jim: It’s also true that some people have been worried about the quality of Citigroup’s loans, both to corporations and consumers, as the economy slows.
Mike: Citibank has always aggressively marketed credit cards, and it has gotten into trouble in the past for having too many deadbeats on its roster.
Jim: There has been a lot of scrutiny about the credit quality of Citigroup’s corporate loans, too. Yet everything I’ve seen in recent quarters shows that the company’s credit quality is improving, not deteriorating. Unless you think the economy is going to crash, Citigroup’s lending record is another reason to buy this stock.
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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael
.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.
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You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).
