There are many reasons to view Bloomin’ Brands as an attractive investment candidate, and some recent insider activity highlights them. The activity, a noteworthy purchase by activist investor Starboard Value, confirms the thesis that Bloomin’ Brands is a play for value-oriented income investors and suggests significant total returns lie ahead.
Total returns, the combined gains, including share price increases, dividends, and share repurchases, drive value for long-term investors. In the case of Bloomin’ Brands, there is a chance for earnings-driven share-price increases amplified by a high 3.1% yielding dividend and a substantial price-multiple expansion.
#1) Starboard Value Takes 9.9% Share in Bloomin’ Brands
Speculation of an activist investor’s involvement began circulating in July when Morgan Stanley filed a similar position with the SEC. Morgan Stanley has often acted as an intermediary for activist and hedge funds; Starboard is a past client with a history of engaging with restaurant businesses. Starboard confirmed the purchase with its filing, which reveals a 9.9% stake or about 8.6 million shares.
This is taken from Starboard’s website “Starboard seeks to invest in deeply undervalued companies and actively engage with management teams and boards of directors to identify and execute on opportunities to unlock value for the benefit of all shareholders.” In recent interviews, Starboard execs have commented on opportunities in the restaurant space and Bloomin’. Prior activist activities include replacing the board at Darden Restaurants and working to improve value at Papa John’s.
#2) Bloomin’ Brands Offers Value Within the Restaurant Industry
The restaurant industry faces headwinds, but the takeaway from the latest earnings reports is that business has normalized above pre-pandemic levels. The restaurant industry continues to grow, albeit slower than the previous year, and margins are widening. Margin growth is expected to continue over the long term, as is revenue growth, which the company’s investments will aid. Bloomin’ Brands has been improving current operations and customer experience while focusing on expansions.
Regarding the value, the stock trades at only 9.5X its earnings, while others in the group trade at much higher valuations. Darden Restaurants is the closest comparison with its diversified portfolio. It trades at 18X its earnings, while Texas Roadhouse, the steak pureplay, trades at an even higher 22X. Cracker Barrel, another prominent sit-down brand in the restaurant industry, also trades above 20X.
#3) There is a Catalyst for a Price-Multiple Expansion
Several catalysts are brewing for Bloomin’ Brands, but 1 stands out as a significant driver of value; the dividend. The stock yields about 3.1%, which plays into the lower valuation. Competitor Darden Restaurants also yields a little over 3.0% but pays double the distribution relative to earnings.
Darden is paying 60% of its earnings while Bloomin’ Brands pays roughly 30%, which begs the question, when will Bloomin’ Brands raise its payout? Now that an activist investor is involved, it could be sooner rather than later. As it is, the company has increased the payout twice since bringing it back after suspending it during the pandemic, and the 20% distribution CAGR is far more sustainable than DRI’s 13%.
The Technical Outlook: Bloomin’ Brands Shows Support At Critical Level
Bloomin’ Brands' price action corrected sharply after the post-pandemic rebound but is now moving up off of a solid bottom. The market recently moved above critical levels at the 2019 highs, confirming that level as support now. Assuming the market follows through on this signal and Starboard can help the company unlock value, shares could continue higher. A move to the all-time high is consistent with the analysts’ outlook; a move above that level could trigger a sharp price updraft. A price-multiple expansion could see the stock double in price over the next 4 to 6 quarters.