Brinker International is our Growth Stock of the Week

Though technology stocks receive outsized attention, there are a number of companies in a variety of other sectors with significant earnings growth.  One of the most notable examples is restaurant stocks, like Brinker International (EAT). 

The pandemic led to a drop in revenues for EAT, which means the company faces easy comps this year. The economy returning to normal also implies increased volume at restaurants. Further, the pandemic led to tougher conditions with rising costs and a shortage of workers, resulting in many restaurant closures.

However, these headwinds are more than offset by the tailwind from the economy reopening as the company delivered 79% revenue growth and 230% earnings growth in its last quarter. While the pandemic has been a net-negative for the restaurant industry, one silver lining for the ones that made it through the pandemic is that they will face less competition. Further, public companies with more resources will be able to withstand cost pressure and invest in technology that could replace some labor. 

On top of these reasons to believe in the company’s growth and widening competitive advantage, EAT is also quite attractive from a valuation perspective. 

Growth Story

If we take a step back from the near-term factors affecting the stock price, we can see that EAT is a great operator that has been successful with the Chili’s and Maggiano’s Little Italy brands. Currently, it has 1,663 restaurants all over the world. 

Over the long-term, EAT has shown an ability to develop and grow new restaurant concepts as well. Over the 10year period from January 2010 to January 2020, it grew revenue from $2.85 billion to $3.34 billion. More impressive, EPS increased from $1.31 to $3.74 which was mostly achieved with an increase in margins and increased efficiencies.

However, the pandemic has also been a growth catalyst for its e-commerce and takeout business. In fact, EAT’s share of revenue for takeout and delivery has consistently trended higher over the last decade before exploding higher during the pandemic. The company is also experimenting with virtual dining concepts that have also proven to be a big hit over the last year.   

Value Opportunity

It is head-scratching to see EAT’s revenue and earnings growth, combined with its forward P/E of 9. This is, in contrast, to the S&P 500’s forward P/E of 23 which creates a nice cushion on the downside. 

The valuation has gotten more attractive following EAT’s string of strong earnings reports over the last 2 quarters and its 30% decline in stock price. This decline happened across the board for all travel and reopening stocks due to concerns about the delta variant. However, there is already evidence that the current wave has peaked. This could be a major catalyst for a year-end rally.

POWR Ratings

EAT’s POWR Ratings are consistent with its strong growth and value profile as indicated by its rating of a B which translates to a Buy. B-rated stocks have posted an average annual performance of 19.7% which compares favorably to the S&P 500’s average annual gain of 7.1%. 

The POWR Rating also evaluates stocks by various components to give additional insight. Given the company’s well-regarded management team, it’s not surprising that EAT is rated a B for Quality. The stock is also well-regarded by the analyst community as 11 out of 17 analysts covering the stock have a Buy rating on it. 

The POWR Ratings also evaluates stocks according to seven additional components including value, growth, momentum, sentiment, industry, and stability. To see more of EAT’s POWR Ratings, click here.

Conclusion

If you look at stocks that are connected to the economy returning to normal, these stocks had massive gains between November of last year and mid-February of this year due to optimism about the vaccine. Since then, these stocks are all off between 20 and 40% as the recovery has been far from smooth with several flare-ups. 

However, there are signs that things are already improving with case counts declining, and the vaccination rate approaching 75%. On top of that, EAT is a company that seems to have used the pandemic to grow its business and move into some higher-margin areas. It will also face less competition and has the resources to handle inflationary pressure better than most other restaurants.

EAT shares were trading at $52.77 per share on Thursday afternoon, up $2.68 (+5.35%). Year-to-date, EAT has declined -6.72%, versus a 19.82% rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.

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