Bloomin’ Brands (NASDAQ:BLMN), best known as the parent company of Outback Steakhouse (among other brands), is quietly but soundly outperforming the market this year, with a gain of over 38% year-to-date. Nevertheless, the new involvement of renowned activist investor Starboard Value means that there could still be plenty of value here. Let’s see why.
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What is Bloomin’ Brands?
Readers are likely most familiar with Bloomin’s most famous brand, Outback Steakhouse, home of the bloomin’ onion, where the parent company derives its name from. In addition to Outback, Bloomin’s portfolio of restaurant concepts also includes Bonefish Grill, Carrabba’s Italian Grill, and Fleming’s Prime Steakhouse & Wine Bar. Altogether, Bloomin’ Brands owns and operates about 1,450 restaurants worldwide. The Tampa, Florida-based company has a market cap of $2.4 billion.
Starboard’s Industry Expertise
The Wall Street Journal reports that the renowned activist firm has taken a large 9.9% stake in the company, making it one of Bloomin’s top five shareholders. The market received the news favorably, with shares jumping nearly 9% on Friday morning when the market opened.
Sometimes, activist investors with little operational experience think that they know more than management and come in, making unrealistic demands that don’t work out. This is not one of those cases. The nice thing about the match between Starboard and Bloomin’ is that Starboard has had considerable success helping to turn around restaurant businesses before, one of which is very similar to Bloomin’ — Darden Restaurants (NYSE:DRI).
Starboard’s involvement with Darden, in which the investment firm replaced Darden’s entire Board of Directors, has become legendary in investing circles. Darden is home to brands like Olive Garden, Longhorn Steakhouse, Capital Grille, and Eddie V’s Prime Seafood.
Starboard famously lobbied Olive Garden to limit the free breadsticks (and to improve their quality) and pushed to add salt to the water it used for cooking pasta (although this change ultimately ended up not coming into fruition, as there were concerns it would void the warranty on the restaurant’s pots and pans).
While these changes may sound trivial, you can’t knock Starboard for being involved and detail-oriented (the activist reportedly had a nearly-300 slide presentation of proposed improvements), and Starboard also enacted bigger changes like spinning off some of Darden’s real estate holdings, cutting costs, and improving operational efficiency. The Darden investment was incredibly lucrative for the firm as Darden stock gained nearly 50% in the 18 months following Starboard’s involvement.
Elsewhere in the restaurant industry, Starboard also invested in Papa John’s (NASDAQ:PZZA), helping the company to rebound after a scandal involving its founder hurt shareholder value. Starboard succeeded in making several changes, such as getting Shaquille O’Neal appointed to the company’s Board of Directors. Starboard’s CEO, Jeff Smith, stepped down as Chairman of Papa John’s this year.
Based on Starboard’s strong track record in the restaurant space, this is a relationship that Bloomin’ and its shareholders can benefit from. While we don’t yet know what Starboard’s plans for Bloomin’ are, the Wall Street Journal reports that “the hedge fund often targets companies that could benefit from operational and financial improvements or be attractive takeover targets.”
This isn’t Bloomin’s first dance with an activist — the restauranter previously dealt with Jana Partners and Barington Capital, who wanted Bloomin’ to spin off some of its brands. While relations between activist investors and management teams are sometimes contentious, observers seem to expect that this will be a more friendly and cooperative engagement.
Furthermore, Jeff Smith recently told CNBC that he sees opportunities in the restaurant sector because many of the stocks are inexpensive.
Bargain Valuation
Smith is right that many restaurant stocks look cheap, and Bloomin’ stock looks particularly attractive in this regard. Shares of BLMN trade at just 8.7 times earnings. This is a steep discount to the S&P 500 (SPX), which trades for about 20 times earnings.
Not only does Bloomin’ trade at a discount to the S&P 500, but it’s also cheaper than its peer and previous Starboard investment, Darden Restaurants, which enjoys a far higher valuation of 18.2 times earnings. Further, Bloomin’s valuation is cheaper than that of other restaurant peers like Texas Roadhouse (NASDAQ:TXRH), which is valued at 22.3 times earnings.
In addition to this attractive valuation, Bloomin’ also has appeal as a dividend stock. Shares of Bloomin’ currently yield over 3% on a forward basis. Furthermore, Bloomin’ is also returning capital to shareholders in the form of share buybacks. As of Bloomin’s Q2 earnings call on August 1, the company had bought back $43 million worth of shares for the year.
In February, Bloomin’s Board of Directors authorized a $125 million share repurchase program, so there is plenty of room for Bloomin’ to continue to buy back shares under this plan. Share buybacks reduce the total number of shares outstanding over time and can be seen as a signal that management believes its stock is undervalued.
Is BLMN Stock a Buy, According to Analysts?
Turning to Wall Street, Bloomin’ Brands earns a Moderate Buy consensus rating based on three Buys and five Hold ratings assigned in the past three months. The average BLMN stock price target of $29.71 implies 8% upside potential.
Investor Takeaway
Bloomin’s year-to-date performance has been a nice story for its shareholders. Given its inexpensive valuation and its decent dividend yield, Bloomin’ already had some appeal for value-oriented investors. But shares now look a lot more interesting based on Starboard’s significant stake in the company and its propensity for bringing improvements to the restaurant stocks that it has gotten involved with over the years.
To be clear, investors will likely have to be patient here and shouldn’t expect the stock to skyrocket overnight. Same-store sales growth has been slow, and shares haven’t really done much over the past decade. However, this is also exactly why having a fresh voice like Starboard come in can help. If the storied activist can enact changes that help Bloomin’ unlock more potential value, this could prove to be a lucrative long-term investment.
