For investors looking for chances in the market, one lasting method is to find companies selling for less than their true value. This method, made famous by Benjamin Graham and Warren Buffett, centers on finding stocks where the present market price seems to be lower than the company's actual worth, judged by its financial condition, earnings ability, and future possibilities. By using a strict filter that focuses on good valuation numbers while also needing acceptable results in other basic categories, investors can sort through the market for possible deals. One stock that recently appeared from such a "Decent Value" filter is Brinker International Inc (NYSE:EAT).
Brinker International, the owner of the Chili’s Grill & Bar and Maggiano’s Little Italy restaurant brands, runs and licenses more than 1,600 places worldwide. An initial check of its basic report indicates it may match the outline of a stock priced below its worth, deserving more examination from investors focused on value.
Valuation: The Center of the Chance
The main attraction of Brinker International from a value view is in its valuation numbers. The company's ChartMill Valuation Rating of 7 out of 10 shows it is priced lower than many similar companies, a main beginning spot for any value investment.
- Price-to-Earnings (P/E): With a trailing P/E ratio of 15.29, EAT sells for a notable amount less than both the S&P 500 average (26.61) and its similar companies in the Hotels, Restaurants & Leisure sector, where the average P/E is above 93. It is less expensive than about 78% of its industry competitors.
- Forward-Looking Numbers: The valuation view stays appealing looking ahead. The Price/Forward Earnings ratio of 12.55 is also much lower than the market and industry averages, making the stock less expensive than around 83% of its sector.
- Cash Flow and EBITDA: More evidence for the low valuation, 88% of industry peers are priced higher based on the Price/Free Cash Flow ratio. The Enterprise Value to EBITDA ratio also points to a valuation lower than the industry average.
For a value investor, these numbers are very important. They stand for the "margin of safety" that Benjamin Graham stressed, buying at a price low enough below a careful guess of true value to allow for mistakes in the study or unexpected market happenings.
Checking Financial Condition and Earnings Ability
A low-priced stock is only a good investment if the company is basically solid. This is where the "decent" needs for condition and earnings ability in the filter criteria are useful, helping to steer clear of typical "value traps." Brinker's scores of 5 in Condition and 6 in Earnings Ability point to a steady, though not perfect, operating foundation.
Financial Condition (Rating: 5/10) The condition review shows a varied but workable picture. On the good side, the company shows strong ability to pay debts. Its Altman-Z score of 3.75 shows little close risk of failure and does better than over 82% of the industry. Maybe more notably, its Debt to Free Cash Flow ratio of 1.16 is very good, indicating it could pay all its debt with just a bit more than a year's worth of free cash flow, doing better than 90% of peers.
The main worry is in cash availability. The company's Current and Quick ratios are low (0.35 and 0.29, in that order), which could point to difficulties in meeting short-term bills. However, this is partly lessened by its strong free cash flow production and workable total debt level, which the report says explains not giving extra weight to the high Debt-to-Equity ratio.
Earnings Ability (Rating: 6/10) Brinker's earnings ability numbers show it is effectively producing returns from its assets and capital. Main strong points include:
- A Return on Equity (ROE) of 94.42%, which is in the top group in the industry.
- A good Return on Invested Capital (ROIC) of 16.64%, doing better than 85% of peers and, importantly, much higher than its cost of capital, meaning it is producing real value for shareholders.
- A Profit Margin of 7.77% that puts it in the better half of the industry.
While gross margins are fairly low and some margins have gone down in recent years, the central returns on capital are strong. For a value investor, steady earnings ability and high returns on capital are necessary, as they give trust that the business can maintain itself and increase its true value over time.
Growth Path and Future View
A full value study must think about not just the now but the later. Brinker's Growth Rating of 5 shows a changing story. The past year has shown very fast growth in Earnings Per Share (up 106%) and Revenue (up 82%), though the long-term revenue trend is down because of planned refranchising.
Looking forward, experts predict a strong EPS growth of almost 14% each year, which is a good sign. The forward Price/Earnings to Growth (PEG) ratio is low, suggesting the present valuation well pays investors for this expected growth. This mix of low valuation and good earnings growth possibility is exactly what value filters try to find: a company that is not just cheap by the numbers but has a way to raise its value.
Conclusion: A Pick for the Value Portfolio
Brinker International makes a strong case for investors using a strict value method. It sells for a clear amount less than the wider market and its own industry, giving that very important margin of safety. Its financial condition, while showing some cash tightness, is supported by very good solvency and cash flow numbers. The company clearly earns money, with notable returns on equity and invested capital. Lastly, it presents a believable growth story in its expected bottom-line earnings.
This match of acceptable basics with a low valuation is the sign of a possible value chance. It suggests the market may be missing the company's ability to produce cash and earnings possibility, concentrating instead on near-term industry difficulties or operational details.
Interested in checking other stocks that match this "Decent Value" outline? You can use the same filter used to find Brinker International here: Discover More Decent Value Stocks.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. The study is based on data and reports from ChartMill. Investors should do their own complete research, including a look at the company's full fundamental analysis report, and think about their own money situation before making any investment choices.
