Morgan Stanley upgrades Brinker International on Chili turnaround, improving sales

Investing.com -- Morgan Stanley (NYSE:MS) analysts upgraded Brinker International (NYSE:EAT), the parent company of Chili’s and Maggiano’s Little Italy, shares to Equal Weight from Underweight and hiked their price target to $115 from $70.

The upward revision is driven by the company’s strong sales trends, significant operational improvements, and a strengthened financial position as key drivers behind the upgrade.

The recent performance of Chili’s has been a standout factor, with same-store sales projected to rise by 20% in the fiscal second quarter. This growth follows effective marketing strategies and service improvements, which have bolstered customer traffic and sustained double-digit comparable sales growth.

But the improving sales performance extends beyond Chili’s, Morgan Stanley notes.

“It’s clear from Bloomberg Second Measure… that current quarter (F2Q) sales are set to be excellent - maybe the best in our coverage,” analysts stated in the report.

Morgan Stanley has also revised its earnings projections for Brinker. Fiscal year 2025 earnings per share (EPS) estimates have been raised by over 25%, from $5.45 to $6.74.

Analysts pointed out that the company’s ability to generate strong operating leverage, combined with reinvestment in labor and marketing, has contributed to this optimism. The updated price target is based on 8.5 times the estimated calendar year 2026 EBITDA, aligning closely with historical valuation levels.

The upgrade comes despite lingering concerns about the casual dining sector’s volatility. Morgan Stanley acknowledged risks such as potential cost inflation and macroeconomic pressures but expressed confidence in Brinker’s ability to sustain its progress.

“The company deserves due credit for the Chili's turnaround they have executed and we're increasingly sold on its durability, and thus see less risk of full reversion of recent trends,” analysts led by Brian Harbour wrote. “It's been quite well appreciated in the stock price by now.”

Analysts also commended Brinker’s strengthened balance sheet, with the net debt-to-EBITDA ratio expected to improve to approximately 1x by the end of fiscal 2025. Free cash flow is projected to grow from $225 million last year to $280 million this year.

Moreover, the outlook for US-focused casual dining appears more favorable heading into the coming year, potentially benefiting the stock.