Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Brinker International, Inc. (EAT): Should You Invest Where You Eat?

Have you eaten at Chili’s lately? If so, then you have supported Brinker International, Inc. (NYSE:EAT). If you prefer a more upscale dining experience, or if you simply prefer Italian food, then perhaps you have dined at Maggiano’s at some point. If so, then you have also supported Brinker International.

Between these two establishments, Brinker International, Inc. (NYSE:EAT) owns and operates nearly 1,600 restaurants around the world. Brinker’s stock is up more than 200% over a three-year time frame, as well as 35% year to date. While this kind of upward momentum is possible to continue in the near term, it isn’t necessarily sustainable over the long haul.

The good news

Brinker International, Inc. (NYSE:EAT) relies heavily on a free spending consumer and the Consumer Confidence Index has shown steady gains over the past several months. This relates to job growth and the housing recovery. Though it’s not often discussed as a reason for rising consumer confidence, the stock market’s ascent also plays a significant role.

Brinker International, Inc. (NYSE:EAT)Another plus for the industry is a decline in food cost inflation. The United States Department of Agriculture has reduced its 2013 expectation for food cost inflation to 2.5% to 3.5% from 3% to 4%. This will lead to significant cost reductions for companies like Brinker International, Inc. (NYSE:EAT), Darden Restaurants, Inc. (NYSE:DRI), and DineEquity Inc (NYSE:DIN).

Other positives for the restaurant industry include a consistent increase in employment within the industry (which indicates confidence in future prospects), more middle-income consumers in emerging markets, improving traffic, strong same-store sales growth, and effective cost containment.

The bad news

We can look at all the trends, but it all goes back to the strength of the consumer. And today’s consumer is constantly looking for value. This has led to a lack of pricing power throughout the industry, which may eventually hurt margins.

Impressive numbers

Brinker International, Inc. (NYSE:EAT) management expects comps to come in at 2% to 3% for this year. It even expects a price increase of 1% to 2% at Chili’s for the year, which is impressive considering how value driven today’s consumer is.

It should also be noted that Brinker International, Inc. (NYSE:EAT) hosts over 1 million diners per day. That being the case, Brinker should be able to weather the storm, even if the economy completely tanks. Once a brand is established on a global basis, there’s a very good chance it will succeed over the long haul.

An interesting disconnect

Brinker International, Inc. (NYSE:EAT) has focused on international expansion, (while also cutting costs), and it has been successful. On the other hand, while revenue increased over the past several years, it still hasn’t reached the 2009 level. At the same time, the stock is at an all-time high.

This tells us that since the depths of the financial crisis, expectations have been extremely low. These low expectations combined with cost-cutting measures have led to consistent earnings growth, but demand still isn’t nearly as high as it was four years ago.

Better options?

Darden Restaurants, Inc. (NYSE:DRI) is a much larger company with a more diversified portfolio. Brands include Red Lobster, Olive Garden, LongHorn, The Capital Grille, Bahama Breeze, and Wildfish Seafood Grille. Darden owns and operates approximately 2,000 restaurants in the United States and Canada.

Revenue has consistently increased over the past three years. Earnings have also been strong on an annual basis, which has allowed Darden Restaurants, Inc. (NYSE:DRI) to return capital to shareholders. For example, Darden currently yields 4.30%, considerably higher than Brinker International, Inc. (NYSE:EAT), which yields 1.90%.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.