Management is optimistic about the future
Brinker International Inc. (EAT)’s management is quite optimistic about the company’s future outlook. At its 2013 fiscal year earnings call, management spoke of targeting EPS (earnings per share) from continuing operation of $2.70 to $2.85 in fiscal 2014.
Factors contributing to average of $2.77 EPS target
To reach this goal, the company expects the following.
Wall Street is expecting a 22% increase in earnings
Wall Street analysts currently expect fiscal year 2014 earnings to come in at $2.76, slightly on the lower end of management’s guidance, as weak US recovery and increased industry competition are reasons that potentially negatively impact earnings. That represents an increase of ~22% in earnings growth for fiscal year 2014. The company is targeting at least 10% to 15% in annual EPS growth throughout fiscal year 2017. Given its historical track record, and that customers continue to switch towards a cheaper casual dining experience, growth momentum doesn’t seem to be stalling.
Valuation doesn’t look too negative
The company’s current forward-price-to-earnings ratio, based on Wall Street analysts’ estimates, also sits slightly below the long-term historical trend. Valuations have expanded (risen) over the past few years likely because of increased confidence for holding equities and the perception that Brinker is now a safer company to hold compared to a few years ago when there was still uncertainty.
Based on the past five years of historical data, Brinker’s current share price may look a bit pricey. Its current forward PE ratio of 14.87 is higher than the five-year average of 14.18. If the overall market falls, then Brinker will also be negatively affected. But as long as earnings continue to grow at a rate of 10%, Brinker will likely deliver at least a 12% return including dividends. If earnings do continue to grow by 20% for quite some time, investors could see a return of 20%+ based on share price appreciation and dividends. These aren’t inferior to McDonald’s (MCD), Yum! Brands Inc. (YUM), and the Consumer Discretionary Select Sector SPDR ETF (XLY)’s returns, while they’re most likely a safer option compared to Darden Restaurants Inc. (DRI).