Key findings
- Using the 2-step free cash flow to equity, Brinker International’s fair value estimate is $53.01
- Brinker International is estimated to be 24% overvalued based on the current share price of $65.83.
- The analyst price target of $65.09 for EAT is 23% above our fair value estimate
How far is Brinker International, Inc. (NYSE:EAT) from its intrinsic value? Using the most recent financial data, we will check if the stock is fairly valued by estimating the company’s future cash flows and discounting them to their current value. One way to do this is by applying the Discounted Cash Flow (DCF) model. This may sound complicated, but it’s actually quite simple!
We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without its flaws. Anyone interested in learning more about intrinsic value should check out Simply Wall St’s analysis model.
Check out our latest analysis for Brinker International
Processing the numbers
We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally speaking, the first stage is one of higher growth, and the second stage is one of lower growth. First, we need to get estimates for the next ten years of cash flows. Where possible, we use analyst estimates, but when these aren’t available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.
In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:
10-year free cash flow (FCF) forecast
| 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
| Leveraged FCF (in million US dollars) | 173.4 million US dollars | 154.1 million US dollars | 154.8 million US dollars | 156.4 million US dollars | 158.8 million US dollars | 161.6 million US dollars | 164.9 million US dollars | 168.4 million US dollars | 172.2 million US dollars | 176.2 million US dollars |
| Source of growth rate estimate | Analyst x4 | Analyst x1 | Estimated at 0.45% | Estimated at 1.06% | Estimated at 1.49% | Estimated at 1.80% | Estimated at 2.01% | Estimated at 2.16% | Estimated at 2.26% | Estimated at 2.33% |
| Present value (in million US dollars) discounted at 8.6% | 160 US dollars | 131 US dollars | 121 US dollars | 112 US dollars | 105 US dollars | 98.4 US dollars | 92.5 US dollars | 87.0 US dollars | 81.9 US dollars | 77.1 US dollars |
(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 1.1 billion US dollars
The second period is also called the terminal value. This is the company’s cash flow after the first period. For various reasons, a very conservative growth rate is used, which cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year Treasury yield (2.5%) to estimate future growth. In the same way as with the 10-year “growth” period, we discount future cash flows to today’s value, using a cost of equity of 8.6%.
Final value (TV)= FCF2034 × (1 + g) ÷ (r – g) = $176 million × (1 + 2.5%) ÷ (8.6% – 2.5%) = $3.0 billion
Present value of terminal value (PVTV)= TV / (1 + r)10= $3.0 billion ÷ (1 + 8.6%)10= 1.3 billion US dollars
Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is $2.4 billion. In the final step, we divide the equity value by the number of shares outstanding. Relative to the current share price of $65.8, the company appears slightly overvalued at the time of writing. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.
Important assumptions
The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. If you disagree with these results, try the calculation yourself and play with the assumptions. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we are considering Brinker International as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 8.6% which is based on a leveraged beta of 1.484. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of global peers with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.
SWOT analysis for Brinker International
- Last year’s profit growth exceeded the industry average.
- The debts are well covered by earnings and cash flows.
- No major weaknesses were identified for EAT.
- According to forecasts, annual revenues are expected to grow faster than the American market.
- Good value based on the P/E ratio compared to the estimated fair P/E ratio.
- The total liabilities exceed the total assets, which increases the risk of financial difficulties.
- According to forecasts, annual sales will grow more slowly than the American market.
Next Steps:
Although the valuation of a company is important, ideally it should not be the only analysis you look at for a company. The DCF model is not a perfect stock valuation tool. Rather, you should apply different cases and assumptions and see how they affect the valuation of the company. For example, slightly adjusting the growth rate of the terminal value can dramatically change the overall result. Can we find out why the company is trading at a premium to intrinsic value? For Brinker International, there are three relevant points to investigate further:
- Risks: You should be aware 2 warning signals for Brinker International we uncovered before considering investing in the company.
- management:Have insiders increased their shares to benefit from market sentiment regarding EAT’s future prospects? Read our management and board analysis with insights into CEO compensation and governance factors.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea of what else you might be missing out on!
PS. Simply Wall St updates its DCF calculation for every American stock daily, so if you want to find out the intrinsic value of another stock, just search here.
Valuation is complex, but we are here to simplify it.
Find out if Brinker International could be undervalued or overvalued with our detailed analysis, including Fair value estimates, potential risks, dividends, insider trading and the company’s financial condition.
Access to free analyses
Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
