Stock Option Advisory

Darden Restaurants (DRI) Serves Up Strong Q3 Earnings

Los Angeles based Darden Restaurants, Incorporated (DRI) gave stock trading investors a reason to be exited by announcing a strong profit for its fiscal third quarter. The parent company of well known restaurants Olive Garden and Red Lobster, recently acquired LongHorn Steakhouse and Capital Grille chains, which it said boosted revenue and profit.

Lead by sales growth at Olive Garden, the company was able to overcome a bad weather quarter to produce an 18% increase in net income, for a total of $126 million in earnings. This amounts to an 88 cent per share income, compared with last year’s fiscal third quarter earnings of $106.4 million, or 72 cents per share.

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After some accounting adjustments, the company said its earnings were 85 cents per share. Stock investing traders will quick to add the company to their trading portfolio, as its adjusted earnings bested analysts estimates by one cent. Traders usually react positively to surprisingly positive announcements as trade prior to earnings releases is usually based on expectations.

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The outlook for the full year of 2008 is also positive for the company. Analysts are expecting annual earnings per share of $2.72 for the company. This would be an 8% rise in year over year earnings. The company says it expects a 2 to 4% increase in continuing operations, which is an important number for a company like Darden, which has acquired and sold several large holdings. Continuing operations are a better indication of company direction as it removes short-term adjustments tied to sales and acquisitions.

Following the earnings release, the company added a 1.5% price gain from after hours’ stock trading, as many investors added the company to their online stock portfolio. This increase was on top of gains from regular trading as some added the stock to their stock market portfolios in advance of the announcement.

Given its 72 cent annual dividend yield, and its $37.78 one year price target (according to analysts), Darden seems like a great fit for investors operating with a long-term wealth building strategy. A covered call investment strategy, relying on short-term covered calls, might be a good short-term move for investors wanting to play a short-term drop after the price spike from earnings.

Darden currently sits right about $30 per share, which means it should have some room to grow if it is headed toward its one year target. The stock is still well below its 52-week high price of $47.60. An aggressive investor could see high returns on investment if the stock were to eventually work its way back toward this price point. Once the new restaurant chains develop into the company’s mold, growth could be stronger.

Investing strategies vary greatly, but the benefit of a company with good fundamentals is that it fits into a wider range of options. As noted, there are several short-term profit ideas that some investors like, while there are also long-term opportunities for those looking to grow over time.

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