Brinker Bags an Upgrade

As much as I rag on Wall Street's wizards in our This Just In series, I've got to hand out kudos to Goldman Sachs (NYSE: GS  ) this morning for taking the long view. In the endless stream of analyst upgrades and downgrades, its projection that restaurateur Brinker (NYSE: EAT  ) will experience "positive tailwinds over the next 12 to 24 months" stands out as a long-term pick in a short-term Wall Street world.

I'm being facetious, of course -- at least in part. At the Motley Fool, we lean more towards investing in stocks for three-to-five years at a time, as opposed to Goldman's one-to-two year prognostication. Still, analysts are rarely quoted in public looking two years into the future. (Let's hope that bold step doesn't get this one kicked out of the club.)

Prior to this morning's upgrade (to "neutral"), Goldman had rated Brinker a "sell" for more than a year. Not one of the firm's brighter calls, I might add. Since Goldman planted its sell flag last January, the stock has soared a good 30%, tripling the S&P 500's performance over the last year. Now that the bull's out of the barn, though, Goldman is finally turning less bearish, noting progress in Brinker's "ongoing restructuring."

What restructuring, you ask? Fellow analyst Prudential (NYSE: PRU  ) educated us on this point last month, in justifying its own upgrade from "neutral weight" to "overweight." (I'm assuming there's no pun intended when a Wall Street firm calls a restauranteur "overweight.") Prudential said it liked Brinker's move toward franchising more of its restaurants as opposed to owning them itself. Also tickling Prudential's fancy: the firm's recent moves to redistribute its cash flows, including selling off Corner Bakery last year, and promising to open fewer new restaurants this year. It'll return that spare cash to shareholders through share buybacks and dividends. Apparently, Goldman also agrees with these moves, if a little less so.

Double-checking with CAPS
So who's right: Goldman with its neutral rating, or Prudential with its buy? Checking the firms' respective records on Motley Fool CAPS, we can see that the two are neck-and-neck in the rankings, with Prudential's 82.45 rating just edging out Goldman at 79.74.

To break the tie, here's my view: I'm going with Goldman and "neutral." Reviewing the firm's numbers, I find Brinker moderately overpriced at a trailing P/E of 18 and an estimated growth rate of just 15%. The fact that the firm generates free cash flow at just one-third the rate of GAAP net profits doesn't endear Brinker any more to me. And I find its 1.1% dividend stingy, both objectively and relative to peers such as Darden (NYSE: DRI  ) at 1.2%, OSI Restaurant Partners (NYSE: OSI  ) at 1.3%, and Ruby Tuesday (NYSE: RI  ) at 1.8%.

My take: This one's a hold at best.

(Hey, but feel free to disagree with me. Just make sure to do it on CAPS, so that when you're proved right, the whole world will know.)OSI Restaurant Partners is aMotley Fool Inside Valuerecommendation.

Fool contributor Rich Smith does not own shares of any company named above. On CAPS, he ranks 23rd out of nearly 24,000 investors.


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