Brinker International has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 14.9% and now trades at $152.82. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Brinker International, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Brinker International Not Exciting?
Despite the momentum, we're sitting this one out for now. Here are three reasons we avoid EAT and a stock we'd rather own.
1. Lack of New Restaurants, a Headwind for Revenue
A restaurant chain’s total number of dining locations influences how much it can sell and how quickly revenue can grow.
Brinker International listed 1,627 locations in the latest quarter and has kept its restaurant count flat over the last two years while other restaurant businesses have opted for growth.
When a chain doesn’t open many new restaurants, it usually means there’s stable demand for its meals and it’s focused on improving operational efficiency to increase profitability.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Brinker International’s revenue to rise by 4.1%, a deceleration versus This projection is underwhelming and indicates its menu offerings will see some demand headwinds.
3. Low Gross Margin Reveals Weak Structural Profitability
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.
Brinker International has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 17.7% gross margin over the last two years. Said differently, Brinker International had to pay a chunky $82.33 to its suppliers for every $100 in revenue. 
Final Judgment
Brinker International isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 13× forward P/E (or $152.82 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d suggest looking at the most dominant software business in the world.
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