Brinker International Inc (EAT, Financial) has experienced a daily loss of 2.52% and a 3-month loss of 11.56%. Despite these losses, it still maintains an Earnings Per Share (EPS) (EPS) of 2.24. The question that arises from these data is: Is Brinker International's stock significantly undervalued? This article aims to provide an in-depth valuation analysis of Brinker International. We encourage you to read on to gain a comprehensive understanding of the company's current intrinsic value.
Company Overview
Brinker International Inc operates casual dining restaurants under the brands Chili Grill and Bar (Chili's) and Maggiano's Little Italy (Maggiano's). Chili's is a Bar and Grill casual dining restaurant known for its Fresh Mex and Fresh Tex favorites, including slow-smoked baby back ribs, craft burgers, fajitas, and bottomless chips and salsa paired with tableside guacamole. On the other hand, Maggiano's is an Italian restaurant brand offering a full lunch and dinner menu with chef-prepared dishes like appetizers, chicken, seafood, veal, prime steaks, and desserts. The company generates most of its revenue from the Chili's segment.
Brinker International's stock price currently stands at $30.92, which is significantly lower than its GF Value of $44.27. This discrepancy paves the way for a deeper exploration of the company's intrinsic value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
According to our valuation method, Brinker International's stock is significantly undervalued. Because it is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it's crucial to review the financial strength of a company before deciding to buy its stock. A good starting point for understanding a company's financial strength is looking at the cash-to-debt ratio and interest coverage. Brinker International has a cash-to-debt ratio of 0.01, which is worse than 96.56% of 349 companies in the Restaurants industry. Our overall financial strength rating for Brinker International is 3 out of 10, indicating that its financial strength is poor.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Brinker International has been profitable 10 times over the past 10 years. Over the past twelve months, the company had a revenue of $4.10 billion and an Earnings Per Share (EPS) of $2.24. Its operating margin is 4.18%, which ranks better than 53.41% of 352 companies in the Restaurants industry. Therefore, Brinker International's profitability is ranked 7 out of 10, indicating fair profitability.
Growth is probably the most important factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Brinker International is 5.1%, which ranks better than 71.21% of 330 companies in the Restaurants industry. The 3-year average EBITDA growth rate is 6.2%, which ranks better than 56.68% of 277 companies in the Restaurants industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Brinker International's ROIC is 7.83 while its WACC came in at 6.27.
Conclusion
In summary, the stock of Brinker International (EAT, Financial) is estimated to be significantly undervalued. The company's financial condition is poor, and its profitability is fair. Its growth ranks better than 56.68% of 277 companies in the Restaurants industry. To learn more about Brinker International stock, you can check out its 30-Year Financials here.
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