Here's Why Investors May Find Brinker (EAT) Appetizing Now

Brinker International, Inc. (NYSE:EAT) is currently one of the best-performing stocks in the U.S. restaurant space. With a Zacks Rank #2 (Buy) and decent share price appreciation, the stock is a lucrative investment choice at the moment.

Shares of Brinker have outperformed its industry in the past six months. The stock has rallied 19.1% compared with the industry’s gain of 2.5%.

Moreover, an upward revision in earnings estimates for 2018 reflects analysts’ confidence in the company’s future earnings. Over the last 60 days, the Zacks Consensus Estimate for 2018 earnings inched up 0.9%. Further, the company delivered positive earnings surprises in three of the trailing four quarters, recording an average beat of 8.65%.

Focus on Franchising Favors Earnings

In order to survive in an industry that is increasingly relying on franchising, Brinker moved from its initial company-owned restaurant model to a franchise model. The company pursues its expansion through franchisees and partnerships. For instance, Brinker acquired 103 franchised Chili’s Grill and Bar restaurants from Pepper Dining Holding Corp. in 2015. Notably, in fiscal 2017, Brinker’s franchise operated locations increased 40%.

Although franchising weighs on near-term revenues as it replaces company-operated sales with franchised sales, it helps reduce the company’s capital requirements and drive earnings over time.

Arguably, earnings growth is of utmost importance for determining a stock’s potential, as surging profit levels often indicate solid prospects (and stock price gains). In 2018, Brinker’s earnings per share are expected to grow 7.5%.

Increased Investment in Digital Platforms — Key Growth Driver

Digital augmentation has lately become a pressing need for U.S. restaurant operators, in order to survive competition and gain greater number of market share. In face of such demand, Brinker is also investing heavily in technology-driven initiatives like online ordering, to augment sales and boost guest services.

Having installed a tabletop technology at all the company-owned restaurants in partnership with Ziosk, the company has now implemented handheld devices in all of California. This is resulting in increased efficiency and speed. Moreover, Brinker effectively uses social media platforms and email database, to drive customer awareness and boost traffic. These initiatives will contribute significantly to Brinker’s business in the near future.

Meanwhile, the To-Go platform has been the fastest-growing segment of the company. In the second quarter, the company delivered positive to-go sales driven by double-digit increases in online ordering.

Brinker also stands to gain from integrating its My Chili's Reward program with Plenti — a rewards program by American Express (NYSE:AXP) that offers leading brands across multiple categories. It gives Chili’s access to Plenti’s huge database of members, and is likely to improve sales and profits.

Expansion Plans to Drive Sales

Brinker is one of the few fast-casual restaurant chains that is continuously expanding its footprint in both existing markets and new ones, despite every macro-economic headwind. Management is particularly looking for growth in emerging and under-penetrated markets. To this end, the company expects to open 38 to 43 restaurants globally in fiscal 2018 that will include new markets like Panama, Chile and Vietnam.

We believe that continual expansion will strengthen the brand’s presence and drive sales, going forward.

Valuation Looks Strong

Looking at Brinker’s Price to Earnings Ratio (P/E) for the current fiscal year, investors might be willing to pay more, as the company is undervalued compared to its peers. The company’s P/E ratio for the trailing 12 months stands at 11.7 while that of the industry’s is 25.7x.

Moreover, per VGM Score that identifies the most attractive value, growth and momentum characteristics, Brinker has a Score of A, indicating that the stock is most likely to outperform.

Other Stocks to Consider

Other top-ranked stocks in the restaurant space include Dine Brands (NYSE:DIN) , Arcos Dorados Holdings (NYSE:ARCO) and Ruth's Hospitality Group (NASDAQ:RUTH) . While Dine Brands and Arcos Dorados sport a Zacks Rank #1 (Strong Buy), Ruth's holds the same rank as Brinker. You can see the complete list of today’s Zacks #1 Rank stocks here.

While both Dine Brands and Ruth’s earnings for 2018 are expected to grow 22.7%, Arcos Dorados’ earnings for 2019 are expected to increase 23.7%.

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