Trump's tax cuts to boost shares of Olive Garden-owner Darden, Guggenheim says

Published Thu, Dec 1 201610:04 AM EST

Guggenheim on Thursday advised clients to buy shares of Darden Restaurants , which operates the Olive Garden and LongHorn Steakhouse chains, as a potential increase in disposable income under President-elect Donald Trump could benefit casual dining stocks. "Our bias is to increase exposure to the more discretionary casual dining segment, as opposed to the more staple in nature quick service, given the outlook for consumer stimulus and already improving consumer confidence," analyst Matthew DiFrisco wrote in a note to clients. On the back of those expectations, the analyst upgraded Darden to buy from neutral, and downgraded McDonald's and Wendy's to neutral from buy. DiFrisco said the Trump rally has pushed consumer confidence above 100, given expectations for tax cuts, increases in the minimum wage and other economic investments. Historically, he says these factors have benefited casual dining stocks. In the past year, shares of Darden are up 29 percent compared, while McDonald's has gained 4 percent and Wendy's is up 21 percent. Darden Restaurants, 1 year Source: FactSet During the last consumer-driven economic cycle, however, analysis by the investment firm shows that Darden significantly outperformed its peers, with the shares up 88 percent compared with a return of 12 percent for the S & P 500, 29 percent for McDonald's and 59 percent for Wendy's . "In a strengthening consumer-driven, macro environment history suggests the greatest upside is in consumer discretionary oriented casual dining whereas consumer staple related quick service restaurants should experience minimal valuation upside," DiFrisco wrote. At the current levels, the analyst believes shares of McDonald's and Wendy's appear "fully valued," while macro headwinds such as higher oil prices could put a cap on sales, and a rising rate environment could limit franchise expansion. "While we continue to have a favorable bias to both quick service burger brands, we see limited upside at their current valuations and see more potential macro headwinds as gasoline becomes an incremental household expense after being a benefit for the last two years," DiFrisco said. Guggenheim believes Darden trades at better valuations and has the potential to maintain above-average same-store-sales in the months ahead, particularly at Olive Garden. "Though casual dining industry trends remain negative, Darden's primary brand, Olive Garden, has remained meaningfully positive the last 4 months, outpacing the casual dining industry by 350bps [basis points]," the analyst wrote. In the next 12 months, Guggenheim predicts, shares of Darden could trade as high as $88, implying a gain of 20 percent from Wednesday's close.

An Olive Garden restaurant in New York.

Adam Jeffery | CNBC

"Our bias is to increase exposure to the more discretionary casual dining segment, as opposed to the more staple in nature quick service, given the outlook for consumer stimulus and already improving consumer confidence," analyst Matthew DiFrisco wrote in a note to clients.

On the back of those expectations, the analyst upgraded Darden to buy from neutral, and downgraded McDonald's and Wendy's to neutral from buy.

DiFrisco said the Trump rally has pushed consumer confidence above 100, given expectations for tax cuts, increases in the minimum wage and other economic investments. Historically, he says these factors have benefited casual dining stocks.