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Why You Should Add Brinker (EAT) Stock to Your Portfolio Now

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Brinker International, Inc. (EAT - Free Report) 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 profitable investment choice at the moment.

Shares of Brinker have outperformed its industry in the past year. The stock has rallied 28.2% compared with the industry’s collective growth of 0.7%.

Moreover, an upward revision in earnings estimates for fiscal 2018 reflects analysts’ confidence in the company’s future earnings. Over the past 60 days, the Zacks Consensus Estimate for fiscal 2018 earnings has been revised upward by 0.3%. Further, the company delivered positive earnings surprise in three of the trailing four quarters, recording an average beat of 7.22%.

Increased Investment in Digital Platforms — Key Growth Driver

Digital augmentation has lately become a pressing need for the U.S. restaurant operators, in order to survive competition and obtain a larger market share. In face of such demand, Brinker is investing heavily in technology-driven initiatives like online ordering. Having installed a tabletop technology at all the company-owned restaurants in partnership with Ziosk, the company has now implemented handheld devices across California. This is resulting in increased efficiency and speed. Moreover, Brinker effectively uses the 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. Brinker’s total sales in the To-Go business increased to 11% in the third-quarter fiscal 2018. In the last reported quarter, the company delivered positive to-go sales, driven by double-digit increases in online ordering.

Expansion Plans to Drive Sales

Brinker is one of the few fast-casual restaurant chains that is continuously expanding its footprint in both existing and new markets, despite all macro-economic headwinds. Management is particularly looking for growth in emerging and under-penetrated markets. To this end, the company expects to open 38-43 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.

Turnaround Strategies at Chili’s

As the Chili’s business has been facing challenges for quite some time now, the company is continuously making critical investments in the brand for marking a turnaround and gearing up for improved performance over the long haul. In fact, in the fiscal second quarter, Chili’s turn-around strategies have started to pay off with traffic and sales moving in the right direction. Further, the fiscal third quarter bore the fruits of transformation with narrower-than-expected sales decline recorded by the company, due to capacity increase in the United States.

Focus on Franchising Favors Earnings

In order to survive in an industry that is increasingly relying on franchising, Brinker shifted from initial company-owned restaurant model to a franchised one. The company pursues 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 fiscal 2018, Brinker’s earnings per share are expected to grow 10.3%.

Valuation Looks Strong

Looking at Brinker’s Price to Earnings Ratio (P/E) for the current fiscal, investors might be willing to pay more as the company is undervalued compared to peers. The company’s P/E ratio for the trailing 12 months stands at 13.8 while that of the industry’s is 23.8x. 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.

Dividend Yield

While Brinker is fairly undervalued compared with industry peers, a look at the company’s dividend yield shows that the stock is a rewarding investment choice for investors right now. Brinker’s current dividend yield stands at 3.2% compared with the industry’s figure of 0%.

Other Stocks to Consider

Other top-ranked restaurant stocks include Denny’s (DENN - Free Report) , Dunkin’ Brands (DNKN - Free Report) and Restaurant Brands (QSR - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Denny’s, Dunkin’ Brands and Restaurant Brands’ earnings for 2018 are projected to grow 15.5%, 12.8% and 28.1%, respectively.

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