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A Recovery You Can EAT

Chad Henage
September 10, 2013

Peter Lynch used to say that he liked keeping up with restaurants because their business is easy to understand, and he could count eating out as research. Brinker International (NYSE: EAT) is a company Lynch noticed years ago, but today many investors might believe the owner of the Chili's chain is simply too big to offer good returns. However, if you ignore the "too big to succeed" idea, this company might spice up your returns.

A better value
One of the best ways to compare companies that pay dividends with those that do not is by using the PEGY ratio. This ratio, used by Lynch, divides a company's P/E ratio by the sum of its projected growth rate and current dividend yield. The lower the number, the better the value as it is priced more cheaply relative to earnings growth and yield.

Among Brinker's peers, we can count companies like Darden Restaurants (NYSE: DRI) and its Red Lobster and Olive Garden chains. We can also count faster-growing concepts like Buffalo Wild Wings (NASDAQ: BWLD) and Panera Bread (NASDAQ: PNRA). While Buffalo Wild Wings is more of a traditional restaurant, and Panera offers a fast-casual option, each is a competitive threat to Brinker's Chili's and Maggiano's chains.

Among these companies, Buffalo Wild Wings is relatively the most expensive. With a forward P/E ratio north of 30, and analysts calling for 18% EPS growth, the company's PEGY is 1.67 (30 / 18%). Darden is growing much slower than Buffalo Wild Wings, but investors are paying almost the same multiple with a PEGY of 1.58. Though Darden pays a 4.4% yield, the company is only expected to grow earnings by 6%. For a stock with a forward P/E ratio over 16.4, this combination of growth and income seems too little to justify the current valuation.

Panera Bread sells for a forward P/E of nearly 25, and analysts are calling for growth of about 17.5%, or a PEGY of 1.43. By comparison to its peers, Brinker's combination of traits seem more attractive. The stock sells for a forward P/E of about 15.5, but with expected earnings growth of 13.6%, and a yield of about 1.8%, the PEGY is 1.01. Brinker looks like a better value, but the natural question is, does the stock sell for a discount for a reason?

A recovery in plain sight
One of the most popular ways to measure a restaurant's success is by its same-store sales growth. One reason Brinker might be valued less than its peers is the company's relatively weak same-store sales results.

Buffalo Wild Wings and Panera Bread were the strongest performers of this peer group, with both companies reporting that same-store sales increased by 3.8%. On the other end of the spectrum, Darden reported that comps were down at its three largest chains. In the middle of the pack was Brinker, which reported Chili's domestic comps were down 0.3%, while international comps were up 2.3%. The company also saw a 0.2% increase in comps at Maggiano's.

Brinker did offer some color about how its traffic was doing rather than just reporting overall sales. Last year, the company's domestic traffic at the larger Chili's chain was up 1.5%, but this year, Chili's has been struggling with decreased traffic.

However, in the last three months, th