Another Bottom For Brinker International As much as we like to be right all the time that is just not the case and Brinker International (NYSE: EAT) is a good example. We called a bottom...

Brinker International Overcomes Inflationary Headwind

As much as we like to be right all the time that is just not the case and Brinker International (NYSE: EAT) is a good example. We called a bottom in Brinker International last summer that proved to be temporary but the underlying thesis remains sound. The company is emerging from the pandemic in fine shape and is now benefiting from the leverage it has gained over the past year. Not only is the company's business exceeding pre-COVID levels but it is widening margins in the face of mounting labor and input costs. While some of the leverage has been gained via pricing, much of it is to do with fixed costs and the benefits of scale and this company is still on the rebound.

Brinker International Beats On The Top And Bottom Line

Brinker International had a great quarter supported by returning restaurant volumes and the addition of stores purchased from a franchisee. The company reported $925.8 million in net revenue which is up 21.7% from last year and 6.5% from 2019 with the rebound still underway. Gains were driven by a 12% increase at Chilis and a 78% increase at Maggiano's that were both coupled with margin expansion.

The company reports labor and input costs are on the rise but the releveraging of fixed costs and internal efficiency more than offset the difference. The restaurant-level operating margin came in at 11% or up 300 basis points from last year while the operating income itself rose 140 basis points to 4.3% of revenue. This resulted in $0.60 in GAAP EPS or up $.34 from last year and $0.71 in adjusted EPS which is more than double last year's take and beat the Marketbeat.com consensus by $0.20.

The Analysts Keep Quiet In Wake Of Earnings

Surprisingly, the analysts have been quiet so far in the wake of the Brinker earnings report but we think they are enjoying the news. Although the trend of the past month or so was a cooling of sentiment in regards to the price the Marketbeat.com consensus rating held firm at weak Buy with a consensus target falling to $5 to the $55.50 region. This target implies about 47% of upside for the stock, not counting the additional 90% offered by the high price target, which suggests the stock is grossly undervalued in light of its ability to generate cash flow during the rebound and return to normalcy.

Meanwhile, the institutions are quietly scooping up shares of the stock as well. The institutional activity has been robust for both buyers and sellers with the net of activity bullish to the tune of $0.429 billion or about 28% of the market cap with shares trading near $38.50. This is quite a chunk, to begin with, and brings the total holdings up to 94% which we view as a telling indicator of future expectations.

The Technical Outlook: Brinker International Is In Reversal

Price action in Brinker International hit a new low just prior to the Q2 release but that appears to be the absolute bottom in prices. The new low is not only an extreme but accompanied by divergent indicators that are now signaling a strong buy. With price action up more than 10% and above the short-term moving average, we view this market as in reversal. The next hurdle will be resistance at the $40 level but we think it will wear down by the next reporting season and price action will be moving higher.