On Thursday, Brinker International (NYSE:EAT), the parent company of Chili's, received an upgraded stock rating from BofA Securities. The firm shifted its view from Underperform to Neutral, while also significantly raising the price target for the company's shares to $90.00 from the previous $63.00.
The upgrade follows a notable increase in Brinker's stock value, which has climbed approximately 95% year-to-date, showcasing a strong market performance that has been attributed to positive investor sentiment regarding Chili's revival. This resurgence has been led by CEO Kevin Hochman's effective management strategies.
BofA Securities noted that the current stock price reflects the successful turnaround efforts at Chili's, but also indicated that the future risk/reward balance appears even, prompting the change to a Neutral stance. While the near-term outlook for Chili's remains positive due to the factors that have driven its recent success, there are questions about the sustainability of its top-line growth and the potential for upward earnings per share (EPS) revisions.
The new price objective is based on a target price-to-earnings (P/E) multiple of 0.8 times relative to the S&P 500, which implies an absolute P/E of 17.0 times. This is an increase from the prior multiple of 0.6 times, or 11.9 times. The forward-looking EPS estimate for fiscal year 2026 is set at $5.30, leading to the updated price target of $90.00.
BofA Securities believes that the adjusted relative multiple, which is one standard deviation above the 10-year average, accurately reflects Brinker's enhanced top-line growth and reduced leverage, justifying the revised price target and rating.
In other recent news, Brinker International has been making notable strides. The parent company of Chili's Grill & Bar posted strong fiscal fourth-quarter 2024 results, with a 6.8% annual revenue increase and a 45% adjusted EPS growth. Notably, Chili's brand has been a key driver of this success, with significant customer traffic and sales in the third quarter, attributed to new product launches and operational investments.
Despite falling short of the consensus estimate with an EPS of $1.61, the company's future strategies emphasize growing traffic. Brinker plans to invest $15-20 million in labor and continue marketing and innovation efforts. In addition, the company intends to open 10-12 new Chili's restaurants, potentially increasing to 15.
Citi revised its price target for Brinker, raising it to $83.00 from the previous $69.00, while maintaining a Neutral rating. However, Citi's analyst warns investors to remain cautious due to the high expectations embedded in the stock's valuation. BMO Capital Markets also adjusted their price target on the company's stock from $85 to $80 while maintaining an Outperform rating.
For fiscal year 2025, Brinker has set a revenue target between $4.55 billion and $4.62 billion, and an adjusted diluted EPS between $4.35 and $4.75. BMO Capital believes Brinker International has the potential to exceed its earnings guidance, despite the EPS miss. These recent developments underline Brinker's commitment to driving traffic and delivering long-term profitable growth through strategic initiatives in marketing, menu innovation, and operational efficiency.
InvestingPro Insights
The recent upgrade from BofA Securities aligns with several key metrics and trends highlighted by InvestingPro. Brinker International's stock has shown remarkable strength, with InvestingPro data revealing a staggering 168.83% price total return over the past year. This exceptional performance is further emphasized by the stock trading at 97.88% of its 52-week high, corroborating BofA's observation of the company's strong market performance.
InvestingPro Tips suggest that Brinker is "Trading at a low P/E ratio relative to near-term earnings growth," which supports the positive outlook on the company's valuation. The PEG ratio of 0.49 for the last twelve months as of Q4 2024 further reinforces this view, indicating that the stock may still be undervalued relative to its growth prospects.
However, investors should note that Brinker "Suffers from weak gross profit margins," with InvestingPro data showing a gross profit margin of 14.21% for the last twelve months as of Q4 2024. This could be a factor to watch as the company continues its turnaround efforts.
For those interested in a deeper analysis, InvestingPro offers 13 additional tips for Brinker International, providing a more comprehensive view of the company's financial health and market position.
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