Buying the Hand That Feeds You
Dear Mr. Berko: Brinker International has increased its earnings and dividends every year since 2011 and expects to do even better in 2018, but the stock price went down in 2017, from $55 to $32. How can that be when sales and earnings continue to increase very nicely? Brinker recently raised its dividend to $1.52 and yields 4 percent. I'd like to buy 600 shares, but I can't figure out why the stock is down. Brinker seems to be very undervalued, and I can't see any reason not to buy it. But Wall Street analysts are not recommending Brinker. What am I missing here? -- GL, Destin, Fla.
Dear GL: You're missing a lot. Did you know that officers and directors, including the president and CEO, began unloading the stock in 2016 in the low-$50 range? You must look under the table if you want to know why.
Restaurants are everywhere -- on nearly every street corner, highway, byway, avenue, boulevard and thoroughfare -- and so much food goes to waste. About 40 percent of the food in the United States goes uneaten. It's tossed out or left to rot. Americans are squandering about $165 billion a year tossing fruits, vegetables, fish, grain products and milk in the garbage. Restaurants' diners leave about 19 percent of their food untouched, and portion sizes, which have ballooned in the past dozen years, are the main culprit. Imagine all that fertilizer, energy, water, land and labor gone to waste.
At the end of 2016, there were 287,351 chain restaurants and 323,456 independents, which have a combined 14.7 million employees (11.6 percent of the U.S. workforce) producing revenues of $799 billion. And 2016 was the worst restaurant year since the Great Depression, according to QSR magazine. Walk-in traffic has been falling for five years, and lunch traffic is in a veritable recession. Considering the expanding numbers of new eateries -- such as Shake Shack, Potbelly, PDQ, Zaxby's, Yum China, Smashburger, BurgerFi, Umami Burger, Five Guys, Papa Murphy's and numerous others competing fiercely for your dollars -- it's little wonder that restaurant unit sales are down. New restaurants are opening every day, faster than you can say "chicken wings and Key lime pie."
Brinker International's (EAT-$39) Maggiano's restaurant (among my favorite Italian eateries) serves portions so huge that 2.3 average male diners could make a meal from a mountainous single serving of rigatoni, lasagna, chicken piccata or chicken Marsala. I took my granddaughter and her boyfriend to dinner at Maggiano's several weeks ago, and the leftovers were so heavy that I nearly got a hernia carrying that food home. EAT owns 52 of these restaurants, and same-store sales declined by 1.9 percent in 2017. EAT also owns 1,622 Chili's Grill & Bar restaurants, a casual dining chain that features Tex-Mex cuisine. And I can tell you that the food there is superb, especially the baby back ribs and scrumptious desserts.
Yes, EAT's earnings have increased very nicely each year, from $1.53 a share in 2011 to $3.20 last year and possibly $3.40 in 2018. But revenues fell from $3.3 billion in 2011 to $2.8 billion in 2017. What goes on under the covers is often more important than what goes on above the covers. In 2011, EAT had 102 million shares outstanding, and the company has been buying back its stock. Today there are only 48 million shares outstanding. Then, profit margins have declined each year, from 5.6 percent in 2011 to 5.1 percent in 2017. Long-term debt nearly tripled in that time frame, and book value has been steadily sinking and is now a negative $10.25.
Management is streamlining operations, simplifying its menu, moderately raising prices and eliminating waitstaff by adding 45,000 Ziosk tablets in its dining rooms, which patrons now use to place orders, pay their checks and entertain children. And though the 4 percent dividend is a sweet return, I doubt the shares have enough upside in the coming few years to warrant owning the stock.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.