Is Bloomin’ a Bargain?

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bloomin’ Brands (NASDAQ: BLMN) has outperformed peers Brinker International (NYSE: EAT) and Darden Restaurants (NYSE: DRI) by substantial margins year to date.

For example, Bloomin’ has appreciated 44%, whereas Brinker and Darden have appreciated 24% and 11%, respectively. At first glance, this might make you think that Bloomin’ Brands is likely to be the best of the three. However, this might be a mistake. 

The good news

Bloomin’ Brands offers brand diversification with Outback Steakhouse, Carrabbass Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse & Wine Bar, and Roy’s.

If you take a good look at this list, you will see that it offers a variety of food, from Italian to Hawaiian. Additionally, since these restaurants offer both casual and upscale dining, different types of consumers are targeted.

Overall, Bloomin’ owns 1,275 restaurants over 48 states and 19 countries, and an additional 203 restaurants are franchised. Bloomin’ also recently opened its first Outback in Shanghai, China.

The bad news

Competition is increasing, especially in the United States, where the market is saturated. Two of the most logical ways to increase market share are menu innovation and acquisitions.

Bloomin’s menus are pretty set as diners like to know what to expect. And with a debt-to-equity ratio of 4.90 versus an industry average of 1.0, Blooomin’ isn’t in a good position for an acquisition. This high debt ratio also makes it tough for Bloomin’ to offer a dividend at any point in the near future. One way for Bloomin’ to gain share is through expansion, but with such a heavy debt load, any form of significant expansion is high risk.

As long as monetary stimulus and low interest rates continue to drive stock and real estate prices higher, Bloomin’ has potential for stock appreciation. But if it’s proven that these markets can’t stand on their own and growth slows, then this debt load could really hurt the company.

High gas prices, elevated real unemployment (14.3% according to Forbes), and increased taxes, aren’t factors that bode well for the restaurant industry. That said, high-income consumers are mostly unfazed by current circumstances, which is good news for Bloomin’s Fleming’s Prime Steakhouse & Wine Bar and Roy’s.

Bloomin’ vs. peers

Bloomin’ owns a profit margin of 1.57%, debt is high, it doesn’t pay a dividend, and it’s trading at 42 times earnings.

Brinker, owner of Chili’s and Maggiano’s Little Italy, sports a profit margin of 5.77%, it yields 2%, and it’s only trading at 18 times earnings. On the other hand, Brinker owns a debt-to-equity ratio of 2.87, which makes the long-term sustainability of the dividend questionable. Brinker might cater to both middle and high-income consumers, but it also lacks brand diversification.

Though Brinker might look a little more appealing than Bloomin’, Darden appears to be the best long-term option of the group. Darden sports a decent profit margin of 4.82%, which isn’t as impressive as Brinker, but offers excellent brand diversification. Darden owns brands Red Lobster, Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, Eddie V’s Prime Seafood, and Wild Seafood Grille.

Darden also knows how to make the most of its brands with superb marketing. This leads to consistent traffic and it’s a big reason why revenue has consistently improved over the past three years. Additionally its profits are consistently strong.

Darden also yields an impressive 4.40%. With a debt-to-equity ratio of 1.32, the dividend should be sustainable for quite awhile. Another selling point for Darden is that it’s currently trading at 15 times earnings, making it the best value of the three aforementioned companies.

Conclusion

Due to high debt levels and a high valuation, Bloomin’ doesn’t look to be a great investment at this time. Brinker might be a slightly better option, but it also comes with debt concerns, and it lacks brand diversification.

Thanks to a generous yield, strong marketing, impressive brand diversification, and good valuation, Darden should be the best long-term investment. That said, investors are looking for growth with smaller companies right now, so the highest quality companies aren’t always top performers. Over the long haul, this should change.


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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