Does Brinker International’s Stock Look Appetizing?

With shares of Brinker International (NYSE:EAT) trading at around $33.37, is EAT an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Q2 EPS was in-line with estimates at $0.50. Q2 revenue came in at $689.80 million versus an expectation of $693.21 million. Revenue increased 1.2 percent on a YoY basis. For the seventh consecutive quarter, Chili’s same-restaurant sales increased. The increase was 1 percent. For the twelfth consecutive quarter, Maggiano’s same-restaurant sales increased. The increase was 0.6 percent.

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Overall, positives included increased menu pricing, favorable commodity pricing on produce and poultry, and improved productivity from the installation of kitchen equipment. Negatives included unfavorable commodity prices for beef and pork, an increase in employee health insurance claims, and increased overtime due to the installation of aforementioned kitchen equipment. In regards to the latter, this is a short-term expense that should pay off long-term.

Now let’s take a look at some important numbers for Brinker International…

E = Equity to Debt Ratio Is High

The debt-to-equity ratio for Brinker International is high. It’s also much higher than the industry average. Brinker International has a higher debt-to-equity ratio than Darden Restaurants (NYSE:DRI) and Chipotle Mexican Grill (NYSE:CMG). The balance sheet for Brinker International is also negative. Operating cash flow is decent at $305.52 million.

Debt-To-Equity

Cash

Long-Term Debt

EAT

2.61

$64.31 Million

$698.43 Million

DRI

1.57

$61.40 Million

$2.93 Billion

CMG

0.00

$573.89 Million

$0.14 Million

 

T = Technicals on the Stock Chart Are Strong

Brinker International has outperformed its competitors by a wide margin over the past year. Brinker International also currently yields 2.40 percent. However, it should be noted that Darden Restaurants currently yields 4.40 percent. Chipotle Mexican Grill doesn’t offer a dividend.

1 Month

Year-To-Date

1 Year

3 Year

EAT

5.63%

7.68%

23.84%

108.90%

DRI

0.90%

1.79%

-0.02%

36.22%

CMG

2.16%

-0.82%

-17.22%

201.50%

 

At $33.37, Brinker International is currently trading slightly below all its averages.    

50-Day SMA

33.53

100-Day SMA

33.60

200-Day SMA

33.65

 

E = Earnings Have Been Strong

Earnings have been growing since 2008. However, keep in mind that earnings can be manipulated. This is especially the case when revenue has been inconsistent, which is the case here.

2008

2009

2010

2011

2012

Revenue ($)in billions

3.86

3.28

2.86

2.76

2.82

Diluted EPS ($)

0.49

0.77

1.34

1.53

1.87

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

668.40

681.90

742.04

728.37

683.51

Diluted EPS ($)

0.28

0.44

0.56

0.59

0.36

 

T = Trends Will Not Support the Industry

Casual dining restaurants have performed moderately well over the past few years. But it’s obvious that middle-income earners aren’t in as strong as a position today as they were prior to the financial crisis. The rally in the stock market over the past few years might have helped those who invested, but low interest rates and other stimulus measures can’t last forever. Once this avenue of income-generation is removed, it’s difficult to see how middle-income earners will remain relatively strong. Payroll taxes have also increased, which means less discretionary income and more selectivity. This is bad news for the casual dining industry.

Conclusion

Brinker International is a good company with great brands. On the other hand, this is also a company that is highly leveraged and hasn’t shown much top-line growth over the past five years. Actually, revenue is considerably lower now than it was in 2008. This picture isn’t likely to improve over the next few years.

Brinker International is a STAY AWAY.

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