How Does Brinker International Compare to Peers in PE Multiple?



Valuation multiple

Investors look at valuation multiples when deciding whether to enter or exit a stock. Valuation multiples are driven by perceived growth, risk and uncertainties, and investor willingness to pay.

There are various multiples available to evaluate a stock. We’ll use the PE (price-to-earnings) multiple due to the high visibility of Brinker International’s (EAT) earnings. Please note that the forward PE multiple is calculated by dividing the current share price with the forecasted EPS (earnings per share) for the next 12 months.

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EAT’s PE multiple

From the above graph, we can see that Brinker International has been trading at lower multiple compared to its peers during the past year. The decline in same-store sales growth in both its brands during the past four quarters has led to declines in its share price and its PE multiple. However, quarter-to-date, the same-store sales growth of Brinker International was flat.

Initiatives such as culinary innovations and the use of cage-free eggs appear to have prompted analysts to raise their EPS estimates by 1%. Along with the company’s better-than-expected fiscal 4Q16 results, these factors appear to have increased investor confidence, which led to a rise in Brinker’s share price and PE multiple. As of August 23, 2016, Brinker was trading at 15.5x, up from its 13.6x on August 10, 2016. Brinker’s peers, Texas Roadhouse (TXRH), Buffalo Wild Wings (BWLD), and Cheesecake Factory (CAKE), were trading at 23.8x, 26.2x, and 18.3x, respectively.

After EAT’s fiscal 4Q16 earnings, analysts have raised their EPS estimates for fiscal 2017 by 1%, which might have already factored in Brinker’s current share price. If the company’s results come in lower than expected, the stock could face selling pressure, which could bring down its PE multiple.

In the next and final part, we’ll look at analyst recommendations and target prices.


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