For investors looking for chances where the market may have missed a company's real worth, a methodical value investing method can be a useful tool. The method finds stocks selling for less than their intrinsic value, based on study of the company's financial condition, earnings, and growth outlook. A "Decent Value" screen uses this idea by selecting for companies with good valuation measures, indicating they are priced low compared to their basics, while also keeping sufficient scores in growth, financial condition, and earnings. This middle ground is key; a low-priced stock is only a real value if the business is stable and has promise for future steadiness or improvement. One company that recently came from this screen is Brinker International Inc (NYSE:EAT).
Valuation: The Center of the Chance
The main draw of Brinker International for a value-focused investor is its valuation measures, which seem appealing compared to both its industry and the wider market. Based on ChartMill's basic analysis, the stock gets a Valuation Rating of 7 out of 10. Important numbers back this view.
- Price/Earnings (P/E) Ratio: At 16.14, EAT's P/E ratio is much lower than the S&P 500 average of 27.67. More notably, it is less expensive than over 77% of similar companies in the Hotels, Restaurants & Leisure industry, where the average P/E is above 36.
- Forward P/E Ratio: The view stays positive looking forward. With a forward P/E of 12.94, Brinker is valued as less expensive than almost 80% of its industry rivals and well under the S&P 500's forward P/E average of 27.20.
- Price/Free Cash Flow: This measure, which values a company on the cash it produces, also shows a low valuation, with EAT ranked as less expensive than over 82% of its industry peers.
For a value investor, these measures point to a possible buffer. The market is valuing Brinker, owner of the Chili’s Grill & Bar and Maggiano’s Little Italy brands, at a lower price, which could be a chance if the company's basic business strength is solid.
Checking Financial Condition and Earnings
A low valuation by itself can be misleading if the company is not financially secure. So, the condition and earnings of a business are key filters. Brinker's scores here are average but show notable strong points. The company gets a Financial Condition Rating of 5 and an Earnings Rating of 6.
The condition review shows a varied but acceptable picture. On the good side, Brinker's Altman-Z score of 3.92 shows low near-term bankruptcy risk and is better than 84% of the industry. Its debt-to-free-cash-flow ratio is a very good 1.05, meaning it could pay off all its debt with just over a year's worth of free cash flow, a sign of high solvency. The main issue is liquidity, with current and quick ratios under 1, suggesting possible difficulties in covering immediate bills without cash flow from operations.
Earnings, however, show strong returns on capital. The company's Return on Equity (ROE) of 88.25% and Return on Invested Capital (ROIC) of 16.80% are very good, beating 95% and 86% of the industry, in that order. This shows that management is very good at creating profits from the capital given by shareholders and debt holders. While gross margins are under industry average, the main profit-producing engine seems efficient.
Growth Path and Future View
Value investing does not forget growth; lasting growth helps narrow the difference between market price and intrinsic value over time. Brinker's Growth Rating is an average 5, marked by strong recent speed paired with more average expectations.
The past year has been very good for the company, with Earnings Per Share (EPS) rising by 50.76% and Revenue increasing by 65.25%. This fast growth has led to the notable ROE and ROIC numbers. Looking forward, analyst expectations are more measured, with EPS growth projected at a solid 15.05% each year. This forward growth rate, while good, helps support the stock's valuation through a low PEG ratio, which adjusts the P/E for expected growth.
The screen's need for "decent" growth is satisfied here: the company has shown it can grow earnings notably, and that growth, though likely to ease, is expected to stay positive. For a value investor, this mix of a low price, high returns on capital, and a believable growth path is the desired profile.
Conclusion: A Pick for the Value Watchlist
Brinker International shows a case that matches key value investing ideas. Its stock is valued at a clear discount to the market and its industry, giving a possible buffer. This discount is there even though the company shows strong earnings through high returns on equity and invested capital. While its balance sheet shows some liquidity pressure, its overall solvency is good. The recent period of fast earnings growth, moving to a forecast of solid double-digit EPS growth, suggests the business speed may not be fully seen in the current valuation.
Naturally, value realization is not certain, and investors must think about industry challenges, consumer spending patterns, and company-specific performance risks. A full review of Brinker's complete fundamental analysis report is suggested for a more detailed look at all its strong points and weak points.
Interested in screening for more stocks that match a similar profile? You can look for other possible chances using the Decent Value Stocks screen on ChartMill.
Disclaimer: This article is for information only and does not make up financial advice, a suggestion to buy or sell any security, or a support of any investment method. The analysis is based on data and ratings given by ChartMill, and investors should do their own study and talk with a qualified financial advisor before making any investment choices.
