What a fantastic six months it’s been for Bloomin' Brands. Shares of the company have skyrocketed 52.7%, hitting $10.08. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Bloomin' Brands, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why do we think Bloomin' Brands will underperform?

We’re happy investors have made money, but we’re cautious about Bloomin' Brands. Here are three reasons you should be careful with BLMN, plus one stock we’d rather own.

1. Flat same-store sales indicate weak demand

Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.

Bloomin' Brands’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.

2. Projected revenue growth shows limited upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Bloomin' Brands’s revenue to stall, close to its flat result for the past seven years. This projection doesn’t excite us and indicates its newer menu offerings will not catalyze better top-line performance yet.

3. High debt levels increase risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Bloomin' Brands’s $1.92 billion of debt exceeds the $66.61 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $323.1 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Bloomin' Brands could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Bloomin' Brands can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final judgment

Bloomin' Brands doesn’t pass our quality test. After the recent surge, the stock trades at 11.2× forward P/E (or $10.08 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.

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