Brinker International, Inc. (NYSE:EAT) is a rapidly growing business that owns Chili's and Maggiano's Little Italy Restaurant chains, which offer medium priced Mexican and Italian cuisine that customers are giving high marks. The company has been growing both the top and bottom lines with the most recent earnings report showing quarterly YoY revenue of over 6% and earnings growth over 15%. These are excellent numbers for a business that is trading at a P/E of only 15 compared to the average P/E of the market of 18, even after the furious selling we've witnessed over the past few weeks. Analysts actually estimate a forward P/E of only 12, which makes the stock look even cheaper.
But EAT isn't just an inexpensive stock, it's also a superior business operating in the consumer discretionary space that continues to benefit from low gas prices. With Saudi Arabia, the largest oil producer in OPEC, recently announcing that they will continue to produce oil at high levels despite the global over-supply, prices continue to decline. The more oil prices decline the more consumer discretionary spending increases. In fact, research shows that consumers in America spend up to 80% of their gas savings and the largest portion of this money is spent at restaurants. It is estimated that the average American spent over $2000 a year on gas before the decline in prices over the past year. If the statistic above is true that we spend 80% of our gas savings and most of that goes to restaurants, then the average person is spending over $1000 year at restaurants, a substantial figure.
With a total market cap of only $2.9 billion, EAT has a lot of room to grow, which looks probable considering its recent results. So not only is EAT performing well on its own and expanding aggressively, but it is doing so in an industry that is also continuing to expand with no end in sight. EAT's 6.57% profit margins, which may seem relatively low for the casual observer, are actually double the average of 3% for the restaurant industry. So even though the company is in its early growth phase of the business cycle, it is producing more cash flow than most other restaurants that have been established for longer and even pays a decent dividend, which is quite rare during this phase of a business.
The 2.65% dividend is also pretty good, and with a payout ratio of only 37% it will likely be raised going forward. This cash flow has become even more important in the current market environment with a return to volatility and increased fear. Dividend paying stocks will outperform as they have historically done when the market declines as conservative investors seek the safety of dividend paying stocks, which bolsters them further and provides an earlier floor than most equities in the market when they eventually rebound. In other words, they are defensive in nature, which is the correct strategy for investors trying to preserve capital during a period of uncertainty.
In conclusion, as gas prices remain low there will be continued increasing sales in the restaurant sector, which EAT is benefiting from directly. The brand is clearly resonating with consumers based on recent growth and there is no reason to expect this will not continue. The fundamentals are solid and there is a decent dividend to boot. Finally, with a conservative valuation of only 15 times earnings and a PEG of 1, the stock looks undervalued.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.