Investment Upgrade for Brinker International

Investing.com — Morgan Stanley (NYSE:MS) analysts have upgraded shares of Brinker International (NYSE:EAT), the parent company of Chili’s and Maggiano’s Little Italy, from Underweight to Equal Weight and raised their price target from $70 to $115.

Key Drivers for Upgrade

The upgrade is primarily attributed to:
– Strong sales trends
– Significant operational improvements
– A strengthened financial position

Chili’s Performance

Chili’s remarkable performance has been a standout factor, with same-store sales expected to rise by 20% in the fiscal second quarter. This increase follows effective marketing strategies and service enhancements that have boosted customer traffic and sustained double-digit comparable sales growth.

Morgan Stanley noted that this sales performance trend is not limited to Chili’s, stating,
> “It’s clear from Bloomberg Second Measure… that current quarter (F2Q) sales are set to be excellent – maybe the best in our coverage.”

Revised Earnings Projections

Morgan Stanley has also adjusted its earnings projections for Brinker, increasing fiscal year 2025 earnings per share (EPS) estimates by over 25%, from $5.45 to $6.74. Analysts highlighted that the company’s strong operating leverage, coupled with reinvestments in labor and marketing, has fostered this optimism. The updated price target reflects 8.5 times the estimated calendar year 2026 EBITDA, aligning with historical valuation levels.

Risks Acknowledged

Despite the positive outlook, Morgan Stanley acknowledged the casual dining sector's inherent volatility, pointing out concerns such as cost inflation and macroeconomic pressures. However, the firm expressed confidence in Brinker’s ability to maintain its progress:
> “The company deserves due credit for the Chili's turnaround they have executed and we're increasingly sold on its durability, and thus see less risk of full reversion of recent trends,” wrote analysts led by Brian Harbour. “It's been quite well appreciated in the stock price by now.”

Financial Health

Analysts noted Brinker’s improved balance sheet, with the net debt-to-EBITDA ratio anticipated to decrease to approximately 1x by the end of fiscal 2025. Free cash flow is expected to grow from $225 million last year to $280 million this year.

Moreover, the outlook for US-focused casual dining looks more favorable heading into the next year, potentially benefiting the stock.