Brinker International Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of Brinker International (NYSE:EAT, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $67.84 per share and the market cap of $3.1 billion, Brinker International stock appears to be significantly overvalued. GF Value for Brinker International is shown in the chart below.
Because Brinker International is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 8.7% over the past three years and is estimated to grow 4.38% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Brinker International has a cash-to-debt ratio of 0.03, which which ranks in the bottom 10% of the companies in Restaurants industry. The overall financial strength of Brinker International is 3 out of 10, which indicates that the financial strength of Brinker International is poor. This is the debt and cash of Brinker International over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Brinker International has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $2.9 billion and earnings of $0.1 a share. Its operating margin of 2.81% better than 69% of the companies in Restaurants industry. Overall, GuruFocus ranks Brinker International's profitability as strong. This is the revenue and net income of Brinker International over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Brinker International is 8.7%, which ranks better than 80% of the companies in Restaurants industry. The 3-year average EBITDA growth rate is -10.5%, which ranks worse than 67% of the companies in Restaurants industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Brinker International's return on invested capital is -0.65, and its cost of capital is 16.63. The historical ROIC vs WACC comparison of Brinker International is shown below:
In conclusion, the stock of Brinker International (NYSE:EAT, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks worse than 67% of the companies in Restaurants industry. To learn more about Brinker International stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
