Brinker International has been on fire lately. In the past six months alone, the company’s stock price has rocketed 103%, reaching $154.32 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Brinker International, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Despite the momentum, we're cautious about Brinker International. Here are three reasons why there are better opportunities than EAT and a stock we'd rather own.
Why Is Brinker International Not Exciting?
Founded by Norman Brinker in Dallas, Brinker International (NYSE: EAT) is a casual restaurant chain that operates the Chili’s, Maggiano’s Little Italy, and It’s Just Wings banners.
1. Lack of New Restaurants, a Headwind for Revenue
The number of dining locations a restaurant chain operates is a critical driver of how quickly company-level sales can grow.
Brinker International operated 1,624 locations in the latest quarter, and over the last two years, has kept its restaurant count flat 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. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margins are an important measure of a restaurant’s 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 15.1% gross margin over the last two years. That means Brinker International paid its suppliers a lot of money ($84.94 for every $100 in revenue) to run its business. 
3. Weak Operating Margin Could Cause Trouble
Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.
Brinker International was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.2% was weak for a restaurant business. This result isn’t too surprising given its low gross margin as a starting point.
Final Judgment
Brinker International isn’t a terrible business, but it doesn’t pass our bar. Following the recent rally, the stock trades at 22.2× forward price-to-earnings (or $154.32 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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