MW This restaurant stock that tripled in 2024 just got downgraded ahead of earnings

By Tomi Kilgore

KeyBanc's issue with the Chili's parent's stock isn't about fundamentals - its valuation leaves little room for error

Sometimes a stock rallies so much that even if the fundamentals are supportive, Wall Street gets a little nervous.

Shares of Brinker International Inc. $(EAT)$, the parent of the Chili's and Maggiano's restaurant chains, skyrocketed 206.4% in 2024 as the key comparable-sales metric - sales of restaurants open at least 18 months - started taking off.

And while the stock was down around 3% in afternoon trading on Friday, it was still up more than 13% this year.

KeyBanc Capital analyst Eric Gonzalez is "in awe" of the company's performance and considers himself a "regular" at his local Chili's restaurant. But that doesn't mean he's still a fan of the stock.

In the latest quarter through Sept. 25, overall comparable sales jumped 13%, including a 14.1% jump for Chili's restaurants. In comparison, comparable sales at Darden Restaurants Inc.'s $(DRI)$ Olive Garden restaurant rose 2% in the latest quarter, and fell 5.9% at Dine Brands Global Inc.'s (DIN) Applebee's chain.

Gonzalez said he expects another "industry-leading," double-digit percentage jump in comparable sales when Brinker reports fiscal second-quarter results next Wednesday, and he also believes the company will boost its full-year profit guidance.

But he downgraded the stock to sector-weight, after being at overweight for at least the past three years. He stressed, however, that his call "has little to do with the company's recent fundamental performance."

Gonzalez believes the stock's meteoric rally in the past year has taken prices "well beyond" what he believed was "realistic bull-case scenario."

"Thus, we believe it would be prudent to take some profits until we can get more comfortable with the potential for meaningful earnings upside beyond our newly revised estimates or the stock's valuation becomes more reasonable relative to its peer group," Gonzalez wrote in a note to clients.

For Brinker's second-quarter earnings report, the FactSet analyst consensus is for adjusted earnings per share to rise to $1.77 from $1.24 a year ago; for revenue to climb 15.3% to $1.24 billion; and for overall comparable sales to increase 18.6%, including a 20.5% pop for Chili's.

In its first-quarter report, the company had raised its guidance range for fiscal 2025 adjusted EPS to $5.20 to $5.50, from $4.35 to $4.75.

Gonzalez just raised his estimate for comparable-sales growth at Chili's to 24% from 12%, and sees potential for fiscal 2025 EPS to approach $7 - but since the current stock price "leaves little room for error," he prefers to wait for a pullback to get back to being bullish.

At current valuations, he prefers Darden's stock, which he rates overweight.

-Tomi Kilgore

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January 24, 2025 15:30 ET (20:30 GMT)

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