Growing company-operated restaurants requires capital
In the previous parts of this series, we saw that Brinker International (EAT) plans to open about eight to ten company-owned Chili’s, four Maggiano’s restaurants domestically, and one Chili’s internationally.
Sources of capital
To add company-operated restaurants, Brinker International will need sources of capital. This is different than a franchise in which the restaurant opening costs are borne by the franchisee. Chipotle Mexican Grill (CMG) doesn’t franchise its restaurants. Restaurants can use a blend of company-operated restaurants and franchises such as McDonald’s (MCD), Popeye’s (PLKI), and Yum! Brands (YUM).
You can invest in MCD and YUM through the Consumer Discretionary Select SPDR (XLY), which holds about 10% of restaurant stocks.
Funding restaurant growth
Sources for funding restaurant growth can be internal or external. The internal sources of funds are the cash the company generates through operations. As of fiscal year 2014, Brinker International (EAT) had about $57.7 million in cash and equivalents. Total debt increased from $807 million to $860 million during the last 12 months.
Brinker International has a high interest coverage ratio of 9.5x compared to 3.3x for Bloomin’ Brands (BLMN) and 2.6x for Darden Restaurants (DRI). This shows that Brinker still has room to take more leverage compared to its peers and is better positioned to grow more units.
Brinker’s debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio was 3.4x, which was better than Darden’s 4.3x and DineEquity’s 5.5x. This ratio indicates how many times the company’s EBITDA is the company’s debt position. Usually, a lower number is better.
Next, we’ll look at the relative valuation for Brinker International and determine if it’s undervalued, fairly valued, or overvalued compared to its peers.