Brinker International, Inc. (EAT), Texas Roadhouse Inc (TXRH): The Market Just Doesn’t Get This Stock

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I’ll admit that I didn’t fully understand this company’s potential either. It’s too easy to look at an established company and assume that their best days are behind them. However, in Brinker International, Inc. (NYSE:EAT)’s case, they can still produce earnings growth for years to come. The problem is, the market doesn’t seem to believe. Trust me, when everyone realizes that this company will continue to grow, today’s stock price will seem like a bargain.

Brinker International, Inc. (NYSE:EAT)

The common complaint
The most common argument for not buying Brinker International, Inc. (NYSE:EAT) is the company’s Chili’s chain has reached its saturation point. With hundreds of locations in the United States, if the company were limited to domestic operations, I might agree with this theory. There is plenty of competition trying to steal sales from Brinker International, Inc. (NYSE:EAT) as well.

Well established companies like Darden Restaurants, Inc. (NYSE:DRI) are trying to turn their chains around, and would like to take sales from Brinker. Smaller and faster growing concepts like Buffalo Wild Wings (NASDAQ:BWLD) and Texas Roadhouse Inc (NASDAQ:TXRH) offer their own brand of customer-stealing concepts. Buffalo Wild Wings (NASDAQ:BWLD) hopes to lure customers in with cheap chicken wings, beer, and a whole bunch of televisions. Texas Roadhouse Inc (NASDAQ:TXRH) hopes to take customers from Brinker International, Inc. (NYSE:EAT) with a high-value mix of meals in a casual atmosphere. While these companies do represent competitive threats, Brinker has a trick up its sleeve.

A concern that isn’t, and where future growth will come from
While Darden Restaurants, Inc. (NYSE:DRI) is trying to turn negative same-store sales around at Olive Garden, Red Lobster, and Longhorn Steakhouse, Brinker mainly has to concentrate on Chili’s. Buffalo Wild Wings (NASDAQ:BWLD) and Texas Roadhouse Inc (NASDAQ:TXRH) will find most of their growth through new domestic locations over the next many years. By contrast, Brinker International, Inc. (NYSE:EAT) will get most of its growth from overseas.

A common concern about Brinker is the company’s lackluster revenue growth. However, investors who think small revenue growth is a major problem are missing the point. Brinker’s international franchisees are the key to future earnings growth. Using franchised restaurants doesn’t add much to the top line, but bottom-line growth can be robust. The great thing about franchised restaurants is, the corporate entity gets not only franchise fees up front, but also gets royalties on a continuing basis.

If you look at Brinker’s current quarter earnings, you’ll get an idea of the possibilities. The company reported revenue that was basically flat. However, EPS jumped 20% because franchise royalties and fees more than made up for a small decline in sales at the company-owned restaurants. Since Brinker International, Inc. (NYSE:EAT)’s overseas franchise locations saw 5.1% same-store sales growth, as the size of the company’s international locations grows, so will net income and cash flow.

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