"Street Critique"-Patrick O'Hare, Editor-in-chief, briefing.com
Wednesday, October 24, 2007PAUL KANGAS: Tonight's "Street Critique" guest is always hungry for a good bargain. He's Patrick O'Hare, editor-in-chief at the investor education web site briefing.com. And pat welcome back to NBR.
PATRICK O'HARE, BRIEFING.COM: Paul, thank you.
KANGAS: You write briefing.com's bargain hunting column where you're quite the contrarian. And I understand Brinker International which trades on the big board under ticker symbol EAT appropriately enough has landed on your radar. It has several restaurant chains in the casual dining segment, but its chart doesn't look too appetizing. Let's have a look at that chart if we may. It's pretty depressed here. Why do you like it at this level?
O'HARE: Well, it's not appetizing unless you are a contrarian investor. When you look at it, you notice that it's down about 25 percent off the 52-week high. And that's been driven by concerns related to consumer spending slowdown. But we think that it's now more reasonably priced for an entry point for a patient-mind investor.
KANGAS: Brinker had earnings out just yesterday. How did it do?
O'HARE: It missed the consensus estimate by $0.05, but year-over-year earnings were up 7 percent, which isn't bad growth. But the miss was attributed really to the company selling some of its units, closing some of the underperforming units and then the impact of some higher commodity costs.
KANGAS: Macaroni Grill, which is Brinker's Italian restaurant chain has - the company says it's negotiating with several potential buyers to sell that chain. What would the sale do for its bottom line?
O'HARE: It should help the bottom line. The proceeds that are received from that sale which it expects to close by the end of fiscal '08 could be used to help buyback stock or even help pay down debt and that should help boost the bottom line for Brinker.
KANGAS: Same store sales have been under pressure recently. How is Brinker going to fix that?
O'HARE: They're in the midst right now of a re-imaging program where they're looking to modernize their existing units, make them more contemporary. They're also introducing some more value-priced menu initiatives that hopefully will drive increased traffic. Importantly, they're slowing their new store development so as to mitigate the impact of cannibalization on existing units.
KANGAS: Brinker owns a large portion of its franchises, but the company wants the change that. It's moving to sell a huge chunk of its Chili's franchises. How does that make Brinker more attractive?
O'HARE: Well, what it will help do is it should help operating margins improve because the cost that the company would have incurred to run company-operated restaurants should decrease. In turn, as they succeed in selling these existing units to existing franchisees, you should see depreciation expense go down, as well and then finally, with the monies they receive from these sales, it again would help them go help repurchase stock and pay down some debt if they choose to do so.
KANGAS: We just have half a minute left, Pat. How long before you expect to see a decent return from this stock?
O'HARE: Well, it's clearly an uncertain economic environment right now. We do think earnings estimates are still at risk. So you need to be patient here, but that's a virtue of value investing.
KANGAS: OK.
O'HARE: Roughly about a year to 18 months here we think the patient- minded investor will be well-rewarded for waiting it out.
KANGAS: Do you own Brinker shares or have any other disclosure to make?
O'HARE: Not at the moment, although I do eat at Chili's.
KANGAS: OK. Thanks for joining us, Pat.
O'HARE: Thank you, Paul.
KANGAS: My guest Patrick O'Hare, editor-in-chief at briefing.com.
