UPDATE: J.P. Morgan Reiterates on Brinker International on Brand-Specific Sales Drivers, Weak Industry Fundamentals
In a report published Thursday, J.P. Morgan analyst John Ivankoe reiterated a Neutral rating on Brinker International (NYSE: EAT), but lowered the price target from $45.00 to $44.00.
In the report, J.P. Morgan noted, “Brinker F1Q EPS of $0.43 missed consensus of $0.45 and our $0.51 and included a $0.02 accrual for upcoming higher advertising spend. Blended comps were down 1.3% vs. a generally expected -1% and the Knapp industry average of -2.4%. This was matched with a restaurant margin miss including 40bps pressure in labor from higher health insurance costs unrelated to ACA. Management lowered guidance to -1% to +1% F14 comps from prior +1-2% (we model 0.2%) and earnings to $2.65-2.75 from prior $2.70-2.85 (we model $2.66). The company said October comps are ‘off to a good start,' outperforming the industry. We agree with the focus on same-unit returns and disciplined new unit openings. Meanwhile F14E capex of $150m drops to $90m by F16E, allowing FCF yield to go from 5.5% to 10% on current prices. We downgraded EAT to Neutral (along with BLMN and TXRH) largely due to our belief that the industry's top-line environment would remain weak and generally below companies' expectations. In fact, we believe the supply demand imbalance remains through at least C14 as we wish other industry participants (Darden namely) would acknowledge that traditional casual dining is a mature industry. While our forecast longer term for EAT continues to support a mid-teens EPS CAGR and mid- to high-single-digit FCF yields, we believe valuation reflects this, especially relative to nearterm SSS risk in the industry. Our revised Dec 2014 price target of $44 implies an 8% FCF yield in C15E or 14x C15E EPS.”
Brinker International closed on Wednesday at $41.02.
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