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Bloomin' Brands

Bloomin’ Brands Is A Speculative Buy (NASDAQ:BLMN)

Image source Restaurant stocks have been on a wild ride in the past few months, to say the least. There was panic selling in the sector back in March after it became clear COVID-19 was creating a crisis, followed by enormous levels of frenzied buying. The rebound has subsided for most restaurant stocks, including one…

Image source

Restaurant stocks have been on a wild ride in the past few months, to say the least. There was panic selling in the sector back in March after it became clear COVID-19 was creating a crisis, followed by enormous levels of frenzied buying. The rebound has subsided for most restaurant stocks, including one of my former favorites in the space, casual dining conglomerate Bloomin’ Brands (BLMN).

Bloomin’ has seen its shares fall by about a third from recent highs, indicating investors may not be quite as enthusiastic about a longer-term recovery, but that things aren’t as bad as they were when shares were selling for less than five dollars. Even with the inherent risk of owning any restaurant stock in the face of huge unknowns related to when the economy will be fully back open, Bloomin’ looks attractive from both a normalized valuation and dividend perspective.

Assessing COVID-19’s damage

Bloomin’ hasn’t been a growth company for a long time. Its core brand is Outback Steakhouse, but has other brands in the portfolio that fit the same customer base, including Carrabba’s and Bonefish. It also has a fine-dining brand called Fleming’s that operates high-end steakhouses, but mostly, this is a casual dining story.

The company has struggled to grow the top-line in recent years, as you can see below.

Source: Seeking Alpha

Bloomin’ has tried to optimize its portfolio over the years but lackluster same store sales have been a problem. Still, I ignored this fact in the past when I was bullish on Bloomin’ because it has other qualities I like. Indeed, revenue growth is but one way to achieve shareholder returns; there are many others.

Bloomin’s story was about optimizing margins, creating cash flow and returning that cash to shareholders. The company raised its dividend to $0.80 per share annually right before the crisis, but has since suspended it. It obviously makes sense the dividend wouldn’t be a priority at this point, but it will be again soon, as it is a core principle of the company’s strategy.

Source: Investor presentation

Indeed, Bloomin’s financial policy lists the dividend at 50%+ payout as the first priority. Bloomin’ has long been an income stock because of this, and it became a truly outstanding income stock earlier this year with the dividend boost. Of course, that’s been derailed, but I think it will get back there again in the relatively near future, making the share price quite attractive today.

Source: Seeking Alpha

Analysts have Bloomin’ creating a huge loss this year, which is no surprise given the enormous disruption that has taken place. Bloomin’ is certainly not alone in its industry in this affliction. However, into next year and especially 2022, the company’s earnings should normalize. Current estimates are for 74 cents in EPS next year, and nearly double that amount for 2022. That seems quite reasonable given revenue is expected to climb back towards $4 billion again next year. It should fairly easily crest $4 billion in 2022, which will help regain some of the lost operating leverage from this year’s decline. This will boost margins and free cash flow, allowing Bloomin’ to get back to returning cash to shareholders.

Pre-COVID-19 outlook provides clues

Bloomin’ offered up some guidance before the crisis took hold that provides us with some clues as to how the normalized business will look, whenever that occurs.

Source: Investor presentation

It was projecting modest comparable sales growth for 2020, as well as additional portfolio and cost optimization efforts to boost margins. Finally, as I mentioned, it recently shifted its focus towards paying a much larger dividend to become an attractive income stock.

Bloomin’ was building this off of a strong foundation from results in recent years that showed the company could grow a bit, and profitably.

Source: Investor presentation

Outback, the most important chain the company has by a wide margin, had previously posted 12 consecutive quarters of US comparable sales growth. That, of course, has ended, but given the enormous declines seen in Q1, we should see some robust comparable sales gains in the coming quarters. Keep in mind these gains would only begin to retake what was lost, but that is an important step on the road to recovery.

Margin improvements have worked in Bloomin’s favor in the past as well, which helped boost profitability on its existing revenue base. This was, and still is critical for Bloomin’ since meaningful top-line growth over the long-term isn’t really an option.

Source: Investor presentation

The above is what Bloomin’ was working on before the crisis, and for this year and next year, it expected a combined $40 million in savings. For a company that posted ~$200 million in operating income last year, $40 million is an enormous amount of cost savings. Bloomin’ has always been serious about cost rationalization, and that will prove more important than ever during and after this crisis.

The valuation and dividend case

Obviously, making a valuation case for a restaurant today is pretty tough just because we know there is huge uncertainty on the horizon. However, consumers have proven over the past couple of months that they want to eat at restaurants, even if that means social distancing, getting takeaway, or ordering delivery. I certainly don’t think the restaurant industry will suffer long-term damage because of COVID-19, but if you do, you should run from restaurant stocks and ignore everything I’ve said.

Source: Investor presentation

I see Bloomin’s substantial FCF generation capability as a huge draw with the share price as low as it is today. We know this year is a disaster because of shutdowns, but on a normalized basis, Bloomin’ looks cheap to me, and if we consider the pre-crisis dividend payment, it is also a very attractive dividend stock.

The stock trades at 7.5X EPS estimates for 2022, and just over 5X 2023 estimates. There are many things that could go right or wrong in between now and then, but Bloomin’ made $1.54 in EPS last year, so this is hardly a stretch. Even if earnings come in a little light against expectations, the stock is trading for just 6.9 times what it earned last year. In other words, Bloomin’ is already pricing in tough conditions from the crisis, and looks poised for some price-to-earnings ratio upside in the coming years.

In addition, the dividend was $0.80 per share annually before the crisis, which would equate to a 7.5% yield on today’s share price. The dividend may not come back until next year, but when it does, anyone that bought at today’s price will have a very sizable yield on cost. Bloomin’ creates more than enough FCF in a normalized year to pay a dividend of $0.80 per share, and given that the dividend is the first priority in the company’s financial policy, it will almost certainly get back there sooner than later.

Putting all of this together, you have a company with a history of improving margins, strong, stable brands, a cheap valuation, and the possibility of a huge yield on cost. There are a lot of unknowns with the restaurant industry today, but Bloomin’ is trading at depressed levels already. I think there is an opportunity here for both valuation upside and the return of a sizable dividend payment. If you can stomach the inherent uncertainty, Bloomin’ is a buy.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BLMN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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