Is It Time To Nibble On Brinker International Stock?

Key Points

• Brinker International had a solid quarter and gave favorable guidance but shares fell. 
• The analysts and institutions support the name and may help the market rebound. 
• Brinker does not pay a dividend but other names that do are supported by the same trends. 

Now looks like a good time to nibble on Brinker International NYSE: EAT. Following a solid report and guidance, the stock price is down more than 3%, which suggests the move could fizzle out soon. The takeaway from the report is that an ongoing rebound and normalization within the restaurant industry continues and is being aided by internal improvements.

This has Brinker growing on the top and bottom lines and widening margins simultaneously.

Brinker Has Tasty Quarter, Gets Punished 

Brinker International has been working diligently to reposition itself. The strategy includes simplification, investment in remodeling and upgrading, advertisement, and new talent, and the moves resonate with consumers. The company reported $1.08 billion in net revenue for a gain of 5.9% compared to last year. The bad news for today is that revenue aligns with the analysts' expectations and did not catalyze a rally. 

Maggiano’s led with a gain of 9.1%, but even the flagship Chili’s brand grew by 6.3%. An increase in pricing and mix drives gains supported by traffic. The margin news is where the report begins to become exciting; the restaurant margin widened by 90 basis points, the operating margin by 110, and the adjusted EBITDA by 1400.

This left the GAAP and adjusted EPS up significantly compared to last year, with the adjusted $1.39 up nearly 21% to outpace the topline strength and beat the Marketbeat.com consensus by 500 bps. 

Guidance is a factor that should have lifted the market for Brinker shares. The company is guiding full-year 2024 to revenue of $4.27 billion to $4.35 billion, 310 bps above consensus at the low end of the range. The earnings guidance is equally good, with an adjusted EPS forecast of $3.15 to $3.55. That’s $0.39 above consensus at the range's low end or about 1200 basis points. 

Brinker International Improves The Balance Sheet 

Brinker International shows solid operations and cash flow improvement and improved the balance sheet in Q2. The company’s cash position is down compared to last year, but assets are flat, and debt is down. Repositioning aided debt, which helped lower the net among quarterly payments, freeing up cash flow. 

The bad news is that this stock still isn’t paying dividends, while most of its competitors are. The value is there at only 13X earnings, but even Bloomin’ Brands NASDAQ: BLMN, which trades at 8X earnings, pays dividends. It yields more than 3% and is only out-distributed by Darden Restaurants NYSE: DRI, which pays closer to 3.25%, with shares near $160. The addition of Ruth’s Chris recently aided it, another noteworthy dividend payer in the restaurant industry. 

Dividends could be a catalyst for Brinker. The stock paid a distribution worth 4.3% that was suspended during the pandemic. If the company brings it back, the stock could see a price-multiple expansion to align it with names like Darden and Texas Roadhouse NYSE: TXRH. 

The Sell-Side is Nibbling On Brinker International 

The sell-side data is mixed, but the takeaway is that analysts and institutions are nibbling on the stock. Analysts rate it at Hold and the price target, which is about 8% above the current action if firm over the last 90 days. Most of the freshest targets are above the consensus, implying it is a cautious estimate. The institutions, which own about 98% of the stock, have bought on balance for 3 consecutive quarters, consistent with the 2023 floor in share prices. 

The price of EAT shares fell more than 3% and as much as 5% in the wake of the Q2 release. However, the move triggered buying at the low end of a range consistent with institutional activity this year. Assuming the big money investors buy the dip, this stock should rebound soon and continue its uptrend in 2023. If not, this stock could retest support at the recent lows and possibly set a new low.