Casual dining restaurant operator Brinker International (NYSE:EAT) took the COVID-19 shutdown orders on the chin. The company canceled its full-year guidance projections, drew down all of its available revolving debt to stabilize the balance sheet, and buckled up for a wild ride. The stock fell as much as 82% year to date in March before recovering to a 36% drop in mid-June. By comparison, the S&P 500 market barometer is trading just 6% lower in 2020.
Is the company behind the well-known restaurant chains Chili's and Maggiano's Little Italy a good buy at these historically low prices? Let's have a look.
The bull case for Brinker
The stock has shown remarkable resilience in the spring and early summer of 2020. Brinker's shares have nearly quadrupled since the market bottom in March, and it wouldn't take that much more of this skyrocketing momentum to make investors whole again.
In the meantime, Brinker's stock trades at affordable valuation rations such as 8.5 times trailing earnings, 6 times free cash flows, and 1.4 times the company's book value. That's enough to drive a value investor distracted.
Chili's has already reopened nearly 900 restaurants for sit-down dining services. Comparable store sales in these locations are down 11% from the same year-ago period, but that's better than the 46% to 65% lower comps in Brinker's forced takeout-and-delivery period. Operating cash flows are already positive and Brinker is paying down its debt balances at the moment.
It's easy to make a value-oriented bull case out of these shareholder-friendly bullet points. That's not the whole story, though.
What the bears are saying
Brinker wasn't a slam-dunk buy before the COVID-19 pandemic came along. In the five-year period from 2015 to the end of 2019, the Chili's parent's investors took a 28% haircut while the broader market rose 57%.
The company's credit ratings had been on negative watch since 2018 and ratings specialist Moody's has already downgraded Brinker's creditworthiness twice in the last three months. The credit rating expert argues that Brinker's debt load is large enough to raise questions about the company's ability to manage it, and the day-to-day liquidity is "weak."
The credit rating cuts coincide almost perfectly with the market bottom. Brinker's shares tripled while the financial experts raised concerns about the company's ability to pay its debts and/or keep the lights on in an environment of reduced top-line inflows. That's a deal-breaker for many investors, and some are voting with their investment accounts. 22% of Brinker's public float was sold short two weeks ago.
The bear case wasn't hard to reach, either.
The final verdict: Neither a buyer nor a seller be
You can certainly buy Brinker shares today, but only if you recognize that it's a risky idea that could backfire in a hurry. Brinker is heavily burdened by long-term debt and the stepwise return to normal operations could take years. This ticker is a lottery ticket with a classic pairing of high risk and high reward.
That being said, I wouldn't sell the stock short either. If all goes well and Brinker finds a path back to normal operations again, all bets are off. The stock could easily double or triple again, all within the next 52 weeks. The negative returns for short-sellers would be disastrous in that scenario.
The only thing I see coming for sure is more volatility. The direction of Brinkers' big moves is about as predictable as your average coin toss. This stock is only for the gamblers out there. Serious investors can find much safer buys with equally exciting growth prospects in a post-coronavirus world.