Key points
- Brinker International is growing and optimizing its profits, riding higher and ready to rally.
- Analysts are raising their targets and see this market hitting a new multi-year high soon.
- The dividend is not yet back, but balance sheet improvements suggest it could be reinstated in F2025.
- 5 stocks we like best about Darden Restaurants
Brinker International Inc NYSE: EAT The stock price is gaining ground after years of wallowing in a trading range. The move triggered by the FQ2/CQ4 earnings report is solid and suggests that the recent uptrend will continue. In this case, the continuation signal follows the trend and represents a reversal. Brinker stock is trending higher within the range and confirms this trend with a high-volume trend signal that also takes restaurant stocks to new highs.
Since the move is due to solid results, improved guidance and analyst support, it could result in significant upside in 2024. The size of the trading range and reversal pattern is worth more than $23 or about 105%; projecting them to the breakout point sets a target range of $67 to $92 over the next two to three years.
Brinker International: Grow and optimize profits
Brinker International reported a solid FQ2/CQ4 with revenue of $1.07 billion, up 4.9% from last year. Revenues are in line with expectations, but exacerbated by margin improvement.
Among the takeaways for potential investors are that revenue is up 23% from the second quarter of 2020, the last comparable quarter before the COVID-19 pandemic, and the stock price is relatively flat. The company achieved revenue gains due to increased traffic and pricing, and all three major segments produced mid-single-digit year-over-year (YOY) comps.
The news on margins is good. The company expanded operating and restaurant margins by nearly 200 basis points despite leaning on higher advertising spending. His move towards simplification is paying off. As a result, GAAP revenue doubled and adjusted revenue grew 30%, leaving adjusted earnings at 99 cents.
Earnings beat the MarketBeat.com consensus by more than 500 basis points, and the strength is expected to continue. The company raised its EPS target from $3.45 to $3.75, a cent on both counts, putting analysts’ consensus estimate in the lower half of the range. The guidelines may be cautious, given the momentum.
Analysts guide the market towards higher prices
Analysts have the stock pegged at “hold” and the consensus price target lags the price action, but the group is guiding the market towards higher prices. MarketBeat tracks three post-release revisions that equate to a Strong Buy with a $50 price target. The $50 target is nearly 25% above consensus and still 10% above of recent price action and suggests the rally will continue.
Brinker International offers some value over its competitors, but there’s a problem. The 12x earnings multiple is low compared to Texas Roadhouse NASDAQ:TXRH, Darden Restaurants NYSE:DRI and even Barrel of crackers NASDAQ:CBRL, but there is no yield. The company cut the payout in 2020 to preserve capital during the pandemic and has yet to reinstate it.
The company has taken on significant debt to finance its growth and is running an equity deficit, so it may not return anytime soon, but the outlook is promising. The business is strong and growing, producing solid cash flows. This allows them to shore up a liquidity position, repay debt and reduce the deficit, which is down nearly 25% year-on-year. At this rate, equity could return to positive territory in early 2025, just two quarters away.
Technical outlook: on the verge of a price increase
Brinker International hit bottom in 2022 and is now in full turnaround. Since then, the stock has risen more than 100%, surpassing critical resistance. Critical resistance lies at the base of a bullish Head and Shoulders pattern near $43.85. Now that the resistance has been broken, the market should be able to sustain a rally. The next targets for significant resistance are at $50 and $60.
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