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Does Brinker International (EAT) Look Appetizing?

Tuesday, March 21st, 2017 

Brinker International is in the services sector and restaurants industry. The company owns, operates, and franchises Chili’s Grill and Bar and Maggiano’s Little Italy restaurants

The current price for EAT is $42.44 and the 52-week range is $40.92 - $55.84.

Looking at the valuation ratios, many compare favorably to the industry average. The current Price/Earnings ratio is 13.26, which is below the industry average of 24.77. This is a positive as we like to see valuation ratios below the industry average as it demonstrates we are getting a good value for that given metric. Price/Sales of 0.64 is well below the industry average of 2.41. Price/Cash Flow of 6.24 is more than half the industry average of 15.93.

An area of concern would be the company’s Price/Tangible Book value as it is not material. Even adding back the intangible assets to the book value, we still see there’s negative equity of $530.6 million.

By researching various restaurant companies in the past, we have seen companies of this nature be asset light due to a heavy franchising model. This does not appear to be the case with Brinker as the company owns most of its restaurants. As of the most recent quarter it owned 949 Chili’s and 52 Maggiano’s, while it franchised a total of 657 Chili’s. Although the company doesn’t have a heavy franchising model, it still appears to be asset light as it owns the land and buildings at only 190 of the 1,001 company owned restaurants.

Although the company is asset light, it still has debt of $1.4 billion on the balance sheet. With little in large assets on the balance sheet, one must question why the company has so much debt. One potential reason is the company may have issued debt to buy back stock. In 2016, the company repurchased $278.8 million worth of stock, and thus far in 2017 it has repurchased $346.2 million worth of stock.

When analyzing these asset light companies and their debt it is important to look at the debt covenants, the cash flow, and when the debt will be coming due. All this information can be found in the 10-Qs and 10-Ks of the company.

Brinker pays a nice dividend of 3.2% and only uses 41.5% of its earnings to pay out that dividend. This is a positive as the company has the capability to increase the dividend, without using too much of its earnings.

Sales have fallen by 2.2% quarter over quarter versus the industry average which has seen growth of 0.9%. Sales have seen an increase of 4.4% year over year versus the industry average which has fallen by 5.3%.

EPS growth looks to have some questions as it has fallen 13.8% quarter over quarter versus the industry average declining by 7.7%. Looking year over EPS fell 1.9%, while the industry average increased 11.5%.

Looking forward to June 2018 and using a forward multiple of 16.5, estimated GAAP EPS of $3.37 gives us a target sell price of $55.61. While this is 31% away from the current price, there is further research that should be conducted before buying this company. The main concerns here would include the questions related to the high debt level and negative equity.  

Do you have a question or a company you'd like us  to take a look at? Email us at Brent@WilseyAssetManagement.com or Chase@WilseyAssetManagement.com.


Brent Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8am and Sunday at 5pm on KFMB AM760. 

Chase is a financial analyst for Wilsey Asset Management and can be heard every Saturday at 8am and Sunday at 5pm on KFMB AM760 as the co-host for the Smart Investing show with his father Brent Wilsey. Information is provided by Reuters.