As we are reaching new highs on the Dow and S&P 500, some companies still cannot catch the tide. Two in particular are Brinker International Inc. (EAT, Financial), which is down 17% since the election, and DineEquity Inc.Ă‚ (DIN, Financial), which is off over 21% in the same time.
For some background, Brinker International is the owner Chili’s and Maggiano’s restaurants with over 1,600 locations. DineEquity owns Applebee's and the International House of Pancakes and has over 3,700 locations across the brand. Make no mistake about it, both are brands. That is why the recent drop in the two companies’ stock price is more of a buying opportunity than a value trap.
The first question that comes to mind is will casual-dining restaurant chains be around 10 or 20 years from now? Yes. People will continue to eat away from their homes and will want to have a sit-down meal that others prepare for an affordable price. All four of these restaurants offer just that. Plus, they are household names for many diners around the country.
Brinker International
In the last decade, the chain has seen its per-share earnings and dividend payments increase, while sales have slowly risen every year since the 2011 low point. More importantly, its full-year guidance remains intact at $3.40 to $3.50 per share, pricing the stock at 12 times forward earnings. What I find interesting is the company has generated over $1.6 billion net since 2007. At this rate, Brinker will produce $1.7 billion net by 2026.
At Chili’s, management described the summer stretch as the toughest quarter for the industry in the past five years, with labor costs increasing significantly as a percentage of sales during the quarter. Comps did turn positive in the opening weeks of October, and is investing sharply in advertising and key initiatives to boost take-out and bar business, driving sales that were down across the board at company and franchise-owned stores.
Brinker continues to buy back stock, issuing $350 million in senior notes that will be used to fund a $300 million accelerated share repurchase program. While I generally hate this type of corporate behavior, it is not a horrible idea to buy back stock when the price is down and interest rates are low. That said, I would rather see it raise money to expand operations and focus on customer experience.
Guru investors Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have small positions totaling less than 2% of the total shares outstanding. The company pays a nice 3% dividend, which should increase going forward. All in all, Brinker is on sale.
DineEquity
The company, as a whole, has had a turbulent decade fluctuating in both sales and net earnings. Applebee’s has seen backward momentum and declining year-over-year sales at its restaurants, leading Barron’s and other analysts to speculate on a 30% fall in 2017. That could already be priced in and the company is still on track to earn over $6 a share this year.
DineEquity has good margins, low capital spending and high return on equity rates, coupled with very little total debt. The company generates $123 million in free cash flow, so it can probably easily weather the short-term pressure from Applebee’s and figure out the next move. In the meantime, investors are receiving a 5.8% dividend payment for holding a stock that is trading at nine times forward earnings.
Guru investors Steven Cohen (Trades, Portfolio) and Greenblatt have small positions, but Michael Dell (Trades, Portfolio) has roughly 15% of his managed assets in DineEquity, good for a 4% ownership stake. The company is reworking its business, focusing on improving the Applebee's chain with new technology and restaurant format and continuing to buy back stock. The casual dining industry has been trending lower since the rise of fast-casual concepts, but DineEquity continues to grow with 25 to 33 new Applebee's locations and 65 to 77 IHOP locations set to open in 2017.
Just for the sake of it
Compare these two names with a Buffett holding, Restaurant Brands International Inc. (QSR, Financial), and the main difference is size. Restaurant Brands has 19,000 restaurants, granted more than 14,000 locations are through its Burger King fast-food chain. The company trades at 35 times earnings, while both Brinker and DineEquity are priced at a fraction of that, offering similar financial metrics with a higher potential for price appreciation.
Maybe I am being too nostalgic since many nights after my high school basketball games were spent at Chili’s and Applebee’s with my teammates. I do remember enjoying the experience, but cannot overlook the fact that this market is crowded with choices.
Disclosure: I do not have a position in any of the stocks mentioned in this article.
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