Below is the one-year stock performance of these companies:
Bloomin’ Brands has grossly outperformed Darden Restaurants, Inc. (NYSE:DRI), but it’s a much smaller company. Bloomin’ Brands has a market cap of $2.8 billion versus $6.1 billion for Darden. Smaller-cap stocks tend to move faster on news, and investors love growth stories in bull markets simply because there is more upside potential.
While Bloomin’ Brands might continue to be a better investment option in the near future, it should be noted that it sports a debt-to-equity ratio of 3.7 versus 1.3 for Darden Restaurants, Inc. (NYSE:DRI). With Bloomin’ highly leveraged, its growth potential will be impeded if the economy doesn’t improve. Worse, if the stock market were to suffer a steep correction, then investors and traders would flee from highly-leveraged growth companies.
While Darden Restaurants, Inc. (NYSE:DRI) isn’t a good defensive play, it’s a bigger ship to turn, it’s not as leveraged, and it currently yields 4.6%, whereas Bloomin’ doesn’t pay any dividends.
You might have also noticed Brinker International, Inc. (NYSE:EAT) in the chart above. Brinker International, Inc. (NYSE:EAT) owns Chili’s Grill & Bar, as well as Maggiano’s Little Italy. It has a market cap of $2.9 billion, making it similar to Bloomin’ Brands in size.
| Trailing P/E | Net Margin | ROE | Dividend Yield | Debt-to-Equity Ratio | |
|---|---|---|---|---|---|
| Bloomin’ | 24 | 2.97% | 51.28% | None | 3.70 |
| Brinker | 19 | 5.74% | 71.15% | 1.90% | 5.40 |
(Source: Zacks.com)
Brinker offers a better value than Bloomin’ Brands Inc (NASDAQ:BLMN), it turns a higher percentage of revenue into profits (net margin), it turns a higher percentage of investor dollars into profits (ROE/Return on Equity), and it offers a 1.9% yield. This might lead you to think Brinker would be a better investment. However, a debt-to-equity ratio of 5.4 is concerning.
Brinker recently hiked its dividend by 20%, but don’t be shocked if the payout is cut at some point in order to reduce debt. If you’re looking for a better long-term investment than Brinker International, Inc. (NYSE:EAT), it’s likely to be Darden Restaurants, Inc. (NYSE:DRI).
Conclusion
Bloomin’ Brands seems to have the correct game plan, with a methodical approach to growth and strategic ideas to improve comps. However, Bloomin’ Brands has fueled its growth with debt, which could lead to danger in the future, especially in an uncertain macroeconomic environment with a hesitant consumer.
Bloomin’ Brands Inc (NASDAQ:BLMN) can cut costs to improve its bottom line, but sustainable top-and bottom-line growth over the next several years isn’t likely. Therefore, Bloomin’ Brands doesn’t look to be a top investment option at this point.
The article A Restaurant Facing Many Headwinds originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
