Grading Three Restaurant Recovery Stocks
See how restaurant companies Bloomin’ Brands Inc., Brinker International Inc. and Darden Restaurants Inc. grade on certain key criteria that you need to consider in order to capitalize on a potential restaurant recovery.
Three Stocks That Could Replenish Your Portfolio in a Restaurant Recovery
Restaurants were some of the companies most adversely affected by the coronavirus pandemic. After months of devastating job losses at national eatery chains and closures of independent dining establishments, 286,000 jobs were gained by restaurants and bars in February 2021. This is the most recent sign that the industry’s recovery may be approaching. The latest stimulus package, the acceleration of vaccine distribution, a relaxation of dining restrictions in some areas and warmer temperatures could further drive restaurant sales in the spring.
Demand trends are expected to improve significantly in upcoming weeks, driven by positive consumer impacts from government stimulus checks and expanded capacity at restaurants. The latest stimulus bill provides $1,400 to many American consumers, who may decide to spend some of that money eating out.
After a slow start, vaccine distribution and administration are accelerating. More than 82.7 million Americans — about 24.9% of the total population — have received at least one dose of the vaccine, according to data as of March 22, 2021, from the Centers for Disease Control and Prevention (CDC).
In response to the increased vaccination numbers, states have begun relaxing or preparing to eliminate capacity restrictions in restaurants and other food and leisure venues. Some research firms think larger restaurant chains will gain market share from a reduced playing field of independent restaurants as indoor dining ramps up in late spring and summer.
St. Patrick’s Day marked the start of what could be a long period of comparable sales recovery for the restaurant sector. It has been over a year since restaurants were closed for indoor dining. Analysts are reporting positive survey data revealing a strong acceleration in comparable sales due to the cycling of the negative impacts associated with the initial shock of the coronavirus pandemic in the year-ago period.
During the pandemic, with temporary restaurant closures, reduced capacity and nascent digital capabilities, more at-home meals were consumed as restaurant prices were rising faster than grocery store and takeout prices. However, restaurants are responding by providing more menu variety, faster service and an improved digital experience to increase same-store sales.
A very high level of uncertainty accompanies this industry. The outcomes range from demand for eating out rebounding faster than anticipated to a sustained period of depressed business conditions with consumers taking longer than expected to get back to their pre-pandemic routines or preferring to continue preparing meals at home.
The U.S. restaurant industry landscape is ever-changing. Fast-food restaurants rebounded more quickly during the early months of the pandemic than full-service restaurants, thanks to their lower prices and takeout expertise. National restaurant chains have struggled, but persevered better than independent eateries and gained market share as many mom and pops didn’t survive. As the pandemic wore on, national chains have improved their digital offerings and takeout experiences.
The restaurant industry is starting to see some tailwinds, but it may take time for consumers to get back to their pre-pandemic routines. It may take until the Fourth of July or longer to see an inflection point when the restaurant recovery will really start to take off.
Bloomin’ Brands Inc. (BLMN), through its subsidiaries, owns and operates casual, upscale casual and fine dining restaurants in the U.S. and internationally. The company operates through two segments: U.S. and international. Its restaurant portfolio has four concepts, including Outback Steakhouse, a casual steakhouse restaurant; Carrabba’s Italian Grill, a casual Italian restaurant; Bonefish Grill, a causal seafood restaurant; and Fleming’s Prime Steakhouse & Wine Bar, a contemporary steakhouse. As of December 27, 2020, the company owned and operated 1,450 restaurants across 47 states, Puerto Rico, Guam and 20 countries. As of February 14, 2021, approximately 99% of Bloomin’ Brands’ U.S. restaurants are open with limited in-restaurant dining capacity (versus 85% as of December 27) in accordance with local mandates.
Brinker International Inc. (EAT) owns, develops, operates and franchises various restaurant brands primarily in the U.S. Based in Dallas, Texas, as of December 23, 2020, Brinker International owned, operated or franchised 1,655 restaurants under the Chili’s Grill & Bar (1,601 restaurants) and Maggiano’s Little Italy (54 restaurants) restaurant brand names. Chili’s operates in the bar & grill category of casual dining. Chili’s menu features authentic fresh Tex-Mex cuisine, including signature items, such as baby back ribs smoked in-house, mix and match fajitas and tableside guacamole. Maggiano’s is a full-service, national, casual dining Italian restaurant brand with facilities themed as classic Italian-American restaurants in the style of New York’s Little Italy in the 1940s. As of late January, about 82% of the company’s Chili’s and 69% of Maggiano’s restaurants were operating with open dining rooms.
Darden Restaurants Inc. (DRI) is a full-service restaurant company. As of May 31, 2020, the company owned and operated 1,804 restaurants through its subsidiaries, mostly in the U.S., comprising 868 Olive Garden units, 522 LongHorn Steakhouse locations, with the rest of the restaurant chains including Cheddar’s Scratch Kitchen (165), Yard House (81), The Capital Grille (60), Seasons 52 (44), Bahama Breeze (41) and Eddie V’s (23). In addition, the company had a total of 62 franchised restaurants across the U.S., Latin America and the Middle East. In July 2014, the company sold its Red Lobster restaurant chain to investment firm Golden Gate Capital in a $2.1 billion cash deal.
AAII’s A+ Stock Grade Summary for Three Restaurant Recovery Stocks
As of March 22, 2021, Bloomin’ Brands had a $2.5 billion market capitalization. Bloomin’ Brands’ stock is up 44.2% in 2021, down 2.8% in the previous five trading days, but up over 400% in the past year. The company reported its fiscal fourth-quarter earnings in mid-February. Currently, Bloomin’ Brands’ price-earnings ratio is not applicable due to negative earnings. The company’s trailing 12-month revenue is $3.2 billion with a negative 5.1% net profit margin. Year-over-year quarterly sales growth most recently was down 20.5%. Analysts expect adjusted earnings to increase from negative $1.86 per share for the fiscal year ending December 2020 to positive $1.14 per share this year.
Brinker International’s stock is up 25.9% in 2021, down 8.4% in the previous five trading days, but up an incredible 570.4% in the past year. The company reported its fiscal fourth-quarter earnings in late January. Currently, Brinker’s price-earnings ratio is 704.6. The company’s trailing 12-month revenue is $2.9 billion, with a 0.1% net profit margin. Year-over-year quarterly sales growth most recently was down 12.5%. Analysts expect adjusted earnings to increase from $0.63 per share to $2.54 per share for the fiscal year ending June 2021.
Darden Restaurants’ stock is up 14.8% in 2021, down 6.5% over the previous five trading days, but up 233.3% in the past year. Currently, Darden’s price-earnings ratio is not applicable due to negative earnings. The company’s trailing 12-month revenue is $6.8 billion with a negative 1.7% net profit margin. Year-over-year quarterly sales growth most recently was down 19.4%. Analysts expect adjusted earnings to increase from negative $0.40 per share for the fiscal year ending May 2020 to positive $3.28 per share this year.
Grading Bloomin’ Brands, Brinker International and Darden Restaurants Stock
Stock evaluation requires access to huge amounts of data and the knowledge and time to sift through it all, making sense of financial ratios, reading income statements and analyzing recent stock movements. To help individual investors with that daunting task, AAII created A+ Investor, a robust data suite that condenses data research in an actionable and customizable way suitable for investors of all knowledge levels.
AAII’s proprietary stock grades come with A+ Investor. These offer intuitive A–F grades for each of five key investing factors: value, growth, momentum, earnings revisions and quality. Here, we’ll take a closer look at Bloomin’ Brands, Brinker International and Darden Restaurants stock grades for growth, momentum and earnings estimate revisions.
Bloomin’ Brands, Brinker International and Darden Restaurants Growth Grades
Growth investing builds on the idea that stocks of companies exhibiting strong, consistent and prolonged growth outperform those of slower-growth companies. AAII measures several dimensions of growth, including year-over-year increases in sales and earnings, long(er)-term historical sales and earnings growth rates, as well as analyst-forecasted long-term earnings growth.
The components consider a company’s success in growing its sales, earnings per share and operating cash on a year-over-year basis for the latest reported fiscal quarter and on an annualized basis over the last five years. High rates, especially compared to the sector median, lead to better scores.
Bloomin’ Brands has a Growth Score of 17, which is very weak. Meanwhile, Brinker International has a Growth Score of 27, which is weak and Darden Restaurants has a Growth Score of 50, which is average.
Bloomin’ Brands, Brinker International and Darden Restaurants Momentum Grades
Momentum grades help uncover stocks experiencing anomalously high rates of return; research finds that stocks with high relative levels of momentum tend to outperform, whereas those with low levels of momentum tend to continue underperforming. Momentum is based on the price change of a stock over a specified period relative to all other stocks.
Bloomin’ Brands has a Momentum Score of 84, which is very strong. Meanwhile, Brinker International has a Momentum Score of 86, which is also very strong.
Darden Restaurants has a Momentum Score of 63, which is strong. This means it ranks near the top of the pack of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters. The most recent quarterly price change is given a weight of 40% and each of the three previous quarters are given a weighting of 20%.
Bloomin’ Brands, Brinker International and Darden Restaurants Earnings Estimate Revisions Grades
Earnings estimate revision scores take into account the magnitude of a company’s earnings surprise in its last two reported fiscal quarters. Often, positive surprises beget further positive surprises — or at least continued sales growth (the exact opposite is generally true, too).
Estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. Earnings estimate revisions are based on the statistical significance of a firm’s last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Bloomin’ Brands has an Earnings Estimate Revisions Score of 52, which is neutral. Meanwhile, Brinker International has an Earnings Estimate Revisions Score of 47, which is also neutral and Darden Restaurants has a score of 53, which is neutral.
Other Bloomin’ Brands, Brinker International and Darden Restaurants Grades
In addition to growth, momentum and earnings estimate revisions, A+ Investor also provides grades for value and quality. Successful stock investing involves buying low and selling high, so valuation is an important consideration for stock selection. Buying stocks that are going to go up typically means buying stocks that are undervalued in the first place, although momentum investors may argue that point.
AAII’s A+ Investor value grade derives from a stock’s value score. The value score is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio. The score is variable, meaning it can consider all six ratios or, should any of the six ratios not be valid, the remaining ratios that are valid. To be assigned a value score, stocks must have a valid (non-null) ratio and corresponding ranking for at least two of the six valuation ratios.
Stocks with a value score from 0 to 20 are considered deep value, those with a score between 21 and 40 are a good value and so on.
Like the value grade, AAII’s A+ Investor quality grade comes from the percentile rank of key metrics. Specifically, the quality grade is the percentile rank of the average of the percentile ranks of the return on assets (ROA), return on invested capital (ROIC), gross profit relative to assets, buyback yield, change in total liabilities to assets, accruals, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the remaining measures that are valid. To be assigned a quality score, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The quality score is used to assess the underlying “quality” of a particular stock. A higher quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period of 1998 through 2019.
Stocks receive better grades (higher scores) for having higher scores for the quality sub-components and worse grades (lower scores) for lower scores for the sub-components.
One of the most popular techniques to search for both value and growth centers around stocks with low price-earnings ratios relative to their earnings growth rates. The price-earnings-to-growth ratio — popularly known as the PEG ratio — is computed by dividing the price-earnings ratio by the earnings per share growth rate.
One of AAII’s stock screens that uses PEG ratios and price strength to find growth stocks trading at a reasonable price is AAII’s Value on the Move PEG With Estimated Growth Screen. This screen has a 14.6% theoretical annual return since inception.
Combining value with price and earnings momentum screens should help to identify reasonably priced stocks that are on the move. However, keep in mind that the purpose of this screen is to illustrate, with real firms, a potentially useful combination of value and momentum analysis.
These two key factors, when combined with the above, provide a holistic view into a particular stock. Further, A+ Investors can see whether Bloomin’ Brands, Brinker International or Darden Restaurants stock passes any of our 60+ stock screens that have outperformed the market since their creation.
Bloomin’ Brands, Brinker International and Darden Restaurants Stock: Bottom Line
Overall, Bloomin’ Brands has a Growth Grade of F, a Momentum Grade of A and an Earnings Estimate Revisions Grade of C. Brinker International has a Growth Grade of D, a Momentum Grade of A and an Earnings Estimate Revisions Grade of C. Meanwhile, Darden Restaurants has a Growth Grade of C, a Momentum Grade of B and an Earnings Estimate Revisions Grade of C.
Whether this makes them good investments depends on your goals and risk tolerance. AAII can help you figure out both and identify which investments align with what works best for you.
We do so through a program of education that teaches you to invest for yourself and become an effective manager of your own wealth — no more relying on others for your financial independence. You can rely on AAII for timeless articles on financial planning and stock-picking, unbiased research and actionable analysis that makes you a better investor.
A+ Investor adds to that qualitative teaching by giving you a powerful data suite that helps you whittle down investment decisions, find stocks, exchange-traded funds (ETFs) or mutual funds that meet your needs and understand your portfolio at a more detailed level.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
If you want an edge throughout this market volatility, become an AAII member.