Billionaire Ken Griffin Bought Brinker International

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Many quick service restaurants are growing fairly quickly- Starbucks, to take an example, reported revenue growth of 11% in its most recent quarter compared to the same period in the previous year, and has announced plans to significantly increase its store count. However, we’re not very optimistic on quick service restaurant stocks as they tend to carry high multiples- Starbucks is trading at 30 times trailing earnings, nearly double Brinker’s P/E multiple. McDonald’s is an exception to the general trend: it is actually priced modestly, at trailing and forward P/Es of 17 and 16 respectively. Note that this places it about even with Brinker, even though McDonald’s has actually been seeing lower sales and net income than a year ago. Of course the company does have a powerful brand, and likely merits something of a premium for that, but Brinker appears fairly undervalued relative to quick service restaurants.

Of course we can also consider other full service restaurants such as Darden Restaurants, Inc. (NYSE:DRI) (owner of Olive Garden and Red Lobster as well as several smaller restaurant brands) and DineEquity Inc (NYSE:DIN), which owns Applebee’s and IHOP. These restaurant stocks are even cheaper, relative to their earnings, than Brinker: Darden’s trailing P/E is 12 while DineEquity’s is only 9. DineEquity is a bit of a special case as that company moves towards more of a franchise model; while the stock is up 49% in the last year, the most recent data shows that 12% of the outstanding shares are held short. It could be a good value opportunity, but there are enough complications that it’s not a screaming buy. Darden looks appealing, both compared to Brinker and to the quick service restaurants we’ve discussed. Not only does it match a value-level multiple with modest growth in its business, it pays a dividend yield of over 4% and- perhaps surprisingly for a business that would be dependent on consumer spending- the stock’s beta is only 0.7. We think that it would be a good stock to buy.

We do think that Brinker looks interesting, and that there’s a good chance Griffin’s investment in the stock will pay off. We certainly think that the spread between full service and quick service restaurants has gotten a bit wider than the growth potential of the two types of businesses. Darden, however, might be an even better value.

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