I call myself a “technofundamentalist,” my term for a stock market analyst who combines technical and fundamental factors to make a unified stock judgment.
When picking stocks, my starting point is often to look at charts of stocks in strong uptrends and work backward to figure out what fundamental factors are driving the shares higher. That was the case with this week’s pick, Brinker International (NYSE: EAT).
Since the shares bottomed in late 2012 they have been unstoppable, gaining nearly 80% in just over 14 months. The surprising reason behind the strong gains: outstanding dividend growth.
You’d probably think a stock with a moderate yield of 2% would hardly be a dividend story, but that’s not the case with EAT. Since 2009, the company has had an average dividend growth rate of just under 20%, rising from $ 0.44 a year in 2009 to $ 0.88 by the end of 2013. It’s now stands at $ 0.96. At the same time, its dividend payout ratio remained consistent in the 35% range.
EAT’s strong dividend growth reflects a well-executed corporate strategy. Brinker operates and franchises casual dining restaurants. Its best-known chains are Chili’s and Maggiano’s Little Italy. Starting as a single outlet in 1975 in Dallas, the company now operates nearly 1,600 restaurants in 33 countries.
Brinker’s post 2008 financial collapse strategy was to become a cost leader in full-service restaurants. It succeeded by avoiding time-limited promotions or discounts common to the industry and instead focusing on a value menu available at all times.
The company also boosted earnings by reducing costs through using a team-based service model that minimized time wasted by servers. Brinker’s investments in modernized kitchen layouts and equipment have also improved cost efficiency.
The recent success of the strategy is reflected in the strong chart.
EAT began its major uptrend in November 2012 just above $ 27. The advance was virtually a straight line until the stock peaked above $ 41 in May 2013. From there, EAT retreated finding support several times in the $ 37 to $ 38 range.
Springing off this $ 38 support a final time in mid-October, shares formed an accelerated uptrend as they advanced sharply for several weeks, reaching a high above $ 47 in mid-November. A mild pullback then brought EAT back down below $ 45 in early January. A small rectangle can be detected between mid-November and mid-January with support at $ 44.54 and resistance at $ 47.61.
The mid-January rally saw the stock briefly exceed $ 50 round number resistance, hitting an all-time high of $ 50.74 last week. This past week, however, it pulled back slightly. On the downside, the key level to watch is the accelerated uptrend line, which currently intersects at $ 46. As long as EAT remains above this level, the stock’s advance should remain intact.
Analysts’ median target is $ 54, while the high target of the 15 analysts that follow the stock is $ 60.
The bullish technical outlook is supported by strong fundamentals.
For the upcoming fiscal third-quarter of 2014, to be reported April 23, analysts project revenue will increase 3.5% to $ 768.8 million from the comparable year-earlier period. Revenue for fiscal 2014, ended in June, is expected to increase 2.4% to $ 2.91 billion from last year.
The earnings outlook is even more positive. For the upcoming third quarter, analysts project a nearly 17% increase to $ 0.84 per share from the comparable year-earlier quarter. For the full 2014 fiscal year, earnings are also expected to rise 17% year over year to $ 2.73 per share.
Risks to consider: Restaurants are sensitive to economic conditions. While GDP growth is strengthening, an unexpected economic decline could hurt EAT’s revenues and earnings. That said, the chain offers solid value, which should appeal to consumers even in poorer times.
Recommended Trade Setup:
– Buy EAT at the market price
– Set stop-loss at $ 44.89, just below current support marked by the bottom of the rectangle
– Set initial price target at $ 56.95 for a potential 18% gain by mid-2014
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