Does Brinker’s Stock Have Upside?

by Trefis Team
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Brinker International’s stock (NYSE:EAT) is down 37% this year and we believe it may have bottomed out. Why is that? The key is the company’s stock, while being 37% lower than it was at the end of 2019, is also 27% lower than it was at the end of 2017. Our dashboard ‘What Factors Drove -27% Change In Brinker’s Stock Between 2017 And Now?‘ provides the key numbers behind our thinking and we explain more below.

Brinker’s revenue saw roughly a 2.1% increase from FY 2017 to FY 2019 (ended June 2019). The Net income margin was flat at 4.8%. However, earnings growth, on a per share basis was a much higher 35.6%, driven by massive share buy-backs. Specifically, the company has invested about $470 million in repurchases in the last two years, resulting in about 24% fewer outstanding shares. While Brinker did have about $167.2 million in cash as of the last report, we believe it will likely be challenging for the company to sustain this level of buybacks.

Finally, Brinker’s P/E ratio fell from about 12x at the end of FY 2017 to 10x at the end of FY 2019. While Brinker’s P/E is down to about 6x now, given the volatility of the current situation, there is a significant additional possible upside for Brinker’s multiple when compared to levels seen in the past years – P/E of 12x at end of FY 2017, and 16x as recent as in late FY 2018.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Brinker’s stock is down by about 39% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 6%. Moreover, about 60-70% of Brinker’s total revenue comes from the US region which is the worst impacted by the outbreak. Most restaurants are closed, while some are running in a takeout-only mode. And lower consumer spending and consumption over the coming months will likely lead to lower demand for food and beverages. These factors are bound to hurt EAT’s revenues. We believe EAT’s Q4 and FY 2020 results will confirm the trend in revenues as the Americas and Europe will show negative growth. It is also likely to accompany a clearer Q1 2021 and FY’21 guidance.

Even if there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the P/E is unlikely to fall much further from current level of 6x.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.

Brinker has seen a great fall in these uncertain times. See how Dunkin’ Brands is doing compared to McDonald’s over this same period.


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