With a median price-to-earnings (or "P/E") ratio of close to 18x in the United States, you could be forgiven for feeling indifferent about Darden Restaurants, Inc.'s (NYSE:DRI) P/E ratio of 19.5x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Darden Restaurants has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
Keen to find out how analysts think Darden Restaurants' future stacks up against the industry? In that case, our free report is a great place to start.
How Is Darden Restaurants' Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Darden Restaurants' to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.8% last year. This was backed up an excellent period prior to see EPS up by 39% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% each year over the next three years. With the market predicted to deliver 10% growth each year, the company is positioned for a comparable earnings result.
With this information, we can see why Darden Restaurants is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.
What We Can Learn From Darden Restaurants' P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Darden Restaurants maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.
Plus, you should also learn about these 3 warning signs we've spotted with Darden Restaurants.
If these risks are making you reconsider your opinion on Darden Restaurants, explore our interactive list of high quality stocks to get an idea of what else is out there.
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