This morning, EAT opened at $19.34. So far today the stock has hit a low of $18.87 and a high of $19.41. As of 12:15, EAT is trading at $18.95, down 62 cents (-3.2%). The chart for EAT looks neutral and S&P gives EAT a neutral 3 STARS (out of 5) hold ranking.
For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $22.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in two months as long as EAT is below $22.50 at October expiration. Brinker would have to rise by more than 18% before we would start to lose money. Learn more about this type of trade here.
EAT hasn't been above $22.50 since May and has shown resistance around $21 recently.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in EAT, DRI, or CAKE.
Posted Aug 19th 2008 10:23AM by Tom Taulli Filed under: Deals
One of my favorite restaurants is Romano's Macaroni Grill, which has a great ambiance and menu. Well, the private equity firm -- Golden Gate Capital – also likes the place. In fact, it has agreed to pay $131.5 million for a majority stake. The current owner is Brinker International Inc. (NYSE: EAT), which is the operator of Chili's Grill & Bar, Maggiano's Little Italy and On The Border Mexican Grill & Cantina.
Romano's has 226 locations across the U.S. But while they are high-quality, the fact remains that the current economic environment has had a dampening effect and in the prior quarter same-store sells fell 5.7%. Brinker has actually tried to sell the division for about a year. Interestingly enough, there will also be an impairment charge for $42 million to $47 million on the transaction.
Brinker will keep a 20% position. But the most important thing is that the company will get a nice slug of cash – which is certainly much desired nowadays.
Benningan's, the casual dining chain where I had many bad dates, and Steak and Ale, a chain I never visited, have filed for Chapter 7 bankruptcy protection, underscoring how cash-strapped diners are not finding deals like unlimited breadsticks all that tempting.
The two chains, which are owned by billionaire John Kluge, have been in financial hot water for months, according toThe Wall Street Journal. The paper reports that the chains were so broke that they did not have enough money to pay their employees for the rest of the week.
"Metromedia Restaurant Group (Kluge's company) earlier this year violated several terms of a lending agreement with GE Capital Solutions," the Journal reports. "It had been in negotiations with lenders for months to stave off the filing, while closing some stores and looking for a buyer, said two people involved in the matter."
There is no hope for a turnaround in these companies anytime soon. Much like diners in these establishments, investors in these stocks are in for a world of indigestion.
MOST NOTEWORTHY: Wright Medical, Bristol-Myers and Tibco were today's noteworthy upgrades:
Thomas Weisel upgraded shares of Wright Medical (NASDAQ: WMGI) to Overweight from Market Weight after transferring coverage to another analyst, as they believe the company is well-positioned for continued good near-term performance.
Bernstein upgraded Bristol-Myers (NYSE: BMY) to Outperform from Market Perform citing valuation, growth, and views the company as a potential M&A target.
Jefferies upgraded Tibco (NASDAQ: TIBX) to Hold from Underperform as they believe investor expectations for a buyout will keep the stock steady despite the company's deteriorating fundamentals.
OTHER UPGRADES:
Independent Bank (NASDAQ: IBCP) was raised to Perform from Underperform at Oppenheimer.
Brinker (NYSE: EAT) was raised at Goldman to Neutral from Sell.
Piper upgraded The9 (NASDAQ: NCTY) to Buy from Neutral.
Today, we can blame the market almost entirely on OIL and THE DOLLAR. Oil rose to a dime within $120.00 today before selling off and the dollar is becoming the PESO with the reading having hot $1.60 per EURO. Interestingly enough, the oil services stocks are not performing well in earnings season despite record prices. More importantly, today's stock market shows that the market is still in a state of flux, and it may have become a stock picker's market. Until this finally doesn't work, the trade is to buy when you feel worried and sell when you are feeling good. Below are today's unofficial market index closing levels:
Brinker International, Inc. (NYSE: EAT) saw shares rise by after the company narrowly bear earnings expectations. The company is one of "stocks to double" by the recession end, and cost cutting and capacity monitoring did more goodwill today than the earnings. Shares were up by almost 7% at $20.90 in the final minutes of the day.
MOST NOTEWORTHY: Time Warner Telecom, Verigy and Brinker were today's noteworthy initiations:
Friedman Billings expects Time Warner Telecom (NASDAQ: TWTC) to post free cash flow growth above consensus expectations and believes carrier spending-concerns are overdone. The firm initiated shares with an Outperform rating and $20 target.
Oppenheimer initiated Verigy (NASDAQ: VRGY) with a Perform rating and $23 target, pointing to the company's tough year over year comps as PC unit growth slows in 2008 as well as its exposure to flash memory chips.
Brinker (NYSE: EAT) was assumed with a Neutral rating at Suntrust, as they expect Chili's to continue to be impacted by weak consumer spending.
OTHER INITIATIONS:
Baird assumed Ulta Salon (NASDAQ: ULTA) with an Outperform rating and $18 target.
Lions Gate (NYSE: LGF) was initiated at Jefferies with a Hold rating and $10-$11 target.
Landstar System (NASDAQ: LSTR) was initiated with a Market Perform rating at Morgan Keegan.
MOST NOTEWORTHY: The Restaurant Sector, Blockbuster and Plexus were today's noteworthy upgrades:
Bear Stearns upgraded the Restaurant Sector to Market Weight from Underweight citing better investor sentiment following Fed rate cuts and the economic stimulus plan; upgraded shares include Brinker International (NYSE: EAT), Cheesecake Factory (NASDAQ: CAKE) and Darden Restaurants (NYSE: DRI).
JP Morgan upgraded shares of Blockbuster (NYSE: BBI) to Overweight from Neutral ahead of the company's Q4 results on March 6, as they believe the quarter will be at least in-line and 2008 guidance will be above Street expectations.
Plexus (NASDAQ: PLXS) was raised to Outperform from Neutral at Credit Suisse as they believe current quarter sales and bookings are tracking ahead.
OTHER UPGRADES:
Maxwell Technologies (NASDAQ: MXWL) was upgraded to Market Perform from Market Underperform at JMP Securities.
The firm also raised Sotheby's (NYSE: BID) to Market Outperform from Market Perform.
Goldman Sachs added Allianz AG (NYSE: AZ) to its Conviction Buy List.
TheStreet.com's Jim Cramer says it's still too early to get contrarian about the universal negativity on retail.
Squeeze?
DuPont (NYSE: DD) (Cramer's Take) better than expected. Countrywide (NYSE: CFC) (Cramer's Take) puts up numbers that don't seem bankruptish. We could have a day's respite from the gloom. We certainly are owed one, at least in Nasdaq land.
Plus, when you go out with people from the trading desks, you are overwhelmed by the negativity.
Last night at a buy-side/sell-side dinner, a smart guy I know who loves the short side tried to make a case for some down-and-out airlines and retailers. He's a price guy, meaning that he believes everything has a price and that you have to start looking at a Lowe's (LOW) here or a Macy's (M) because if you start buying now, put some on, you will be getting a pretty decent risk-reward ratio.
I thought people were going to throw things at him. He was immediately ridiculed as someone who didn't understand what's out there, the collapse of consumer spending as evidenced by Brinker's (NYSE: EAT) (Cramer's Take) Chili's, AT&T (NYSE: T) (Cramer's Take), Family Dollar (NYSE: FDO) (Cramer's Take) and all of the other usual suspects Tuesday.
MOST NOTEWORTHY: Intuitive Surgical, Brinker and Circuit City were today's noteworthy downgrades:
Wachovia downgraded Intuitive Surgical (NASDAQ:ISRG) to Market Perform from Outperform, as they view shares as fully valued and notes that the company may guide 2008 below consensus.
Brinker (NYSE:EAT) was downgraded to Underweight from Hold at KeyBanc following disappointing Q2 same-store-sales report and earnings.
Cowen downgraded Circuit City (NYSE:CC) to Neutral from Outperform, citing limited visibility into the timing of the company's turnaround.
OTHER DOWNGRADES:
Goldman removed EMC Corp (NYSE:EMC) from its Tech Framework Growth List and added Autoliv (NYSE:ALV) to its Pan-European Sell List.
MOST NOTEWORTHY: Centene, Brinker International, Harmonic, Idex and Royal Dutch Shell were today's noteworthy upgrades:
Jefferies upgraded shares of Centene Corporation (NYSE: CNC) to Buy from Hold as they expect the company is benefiting from above 20% revenue growth next year and SG&A leverage opportunity over the next 12–18 months.
Bear Stearns upgraded shares of Brinker International (NYSE: EAT) to Outperform from Peer Perform as they believe Brinker's turnaround efforts can enhance shareholder value.
Friedman Billings raised shares of Harmonic (NASDAQ: HLIT) to Outperform from Market Perform based on the favorable outlook for cable and satellite spending on HD video and other projects.
The firm also upgraded Idex Corporation (NYSE: IEX) to Outperform from Market Perform, citing the company's positive 2008 outlook and solid end markets.
CIBC upgraded J. Crew Group (NYSE: JCG) to Sector Outperformer from Sector Performer and Parker Hannifin (NYSE: PH) to Sector Performer from Sector Underperformer.
MOST NOTEWORTHY: Starbucks Corporation, Brinker, Healthways and Fluor were today's noteworthy downgrades:
Banc of America downgraded Starbucks Corporation (NASDAQ: SBUX) to Sell from Neutral, and lowered their target to $23 from $27, as they see downside risk to estimates due to slower growth. The firm is concerned that expectations for a near-term recovery are too high.
Goldman downgraded Brinker International (NYSE: EAT) to Sell from Neutral citing macro economic pressure on sales.
Credit Suisse downgraded Healthways Inc (NASDAQ: HWAY) to Neutral from Outperform on valuation.
Fluor Corporation (NYSE: FLR) was downgraded to Hold from Buy at Morgan Joseph on valuation.
Although they spent most of the day in the green the indexes gave up ground through most of the session to close just in the red.
The NYSE had volume of 3.6 billion shares with 1,612 shares advancing while 1,706 declined for a loss of 6.18 points to close at 9,428.86. On the NASDAQ, 2.2 billion shares traded, 1,426 advanced and 1,685 declined for a loss of -2.65 to 2,542.24.
EMC Corporation (NYSE: EMC) rose $1.33 (8%) to $19.05; ahead of it's subsidiary VMware making its debut on the NYSE tomorrow in an IPO that analysts are predicting will be big. EMC will retain 90% of the shares. This is likely the reason for the active calls as EMC Corp. (NYSE: EMC) saw heavy volume on the August 19 calls (EMCHT) with over 56,000 options trading.
In options there were 5.4 million puts and 5.8 million calls traded for a put/call open interest ratio of 0.92. The CBOE Volatility Index has been high closing today at 26.57. This is the fear indicator of the market. Not only is the index up, but options on the index are high with the CBOE S&P 500 Volatility Index (NASDAQ: $VIX) moving volume on the August 25 calls (VIXHE) with over 35,000 contracts.
Other stocks with active options include State Street Boston (NYSE: STT) saw heavy volume on the November 75 calls (STTKO) with over 60,000 options trading. Most of the active puts were on the indexes and the iShares Russell 2000 ETF (NYSE: IWM) had volume on the August 78 puts (IOWTZ) with over 86,000 options trading.
Kevin Kersten is an Options Analyst with InvestorsObserver.com. Disclosure note: Mr. Kersten owns and or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.
MOST NOTEWORTHY: Red Lion Hotels (RLH), Constellation Energy (CEP), Brinker Int'l (EAT), Nvidia (NVDA) and InfoSpace (INSP) were today's noteworthy upgrades:
Baird upgraded Red Lion Hotels (NYSE: RLH) to Outperform from Neutral based on valuation, brand expansion progress and takeover potential.
Constellation Energy (NYSE: CEP) was upgraded to Buy from Hold at Citigroup based on higher cash flow expectations and valuation.
JP Morgan upgraded Brinker (NYSE: EAT) to Overweight from Neutral, and sees potential upside from slower unit development and a possible Mac Grill sale.
BMO Capital upgraded Nvidia (NASDAQ: NVDA) to Outperform from Market Perform following a strong second quarter.
Stanford upgraded InfoSpace (NASDAQ: INSP) to Hold from Sell on valuation; They consider the core online segments looks to be priced into the stock and downside support is given with tax credits and the cash balance...
OTHER UPGRADES:
Citigroup raised Cox Radio (NYSE: CXR) to Hold from Sell.
JP Morgan upgraded shares of PepsiAmericas (NYSE: PAS) to Neutral from Underweight.
Friedman Billings upgraded shares of Emulex (NYSE: ELX) to Outperform from Market Perform.
DirecTV (NYSE: DTV) was raised to Buy from Hold at Gabelli.
Seagate (NYSE: STX) was upgraded to Buy from Neutral at Goldman.
US Steel (NYSE: X) volatility Up on unconfirmed chatter that Atticus is building stake. X is recently down $3.18 to $89.49. Unconfirmed chatter is circulating that Atticus Capital has acquired a 10% stake in X. X September option implied volatility of 45 is above its 26-week average of 38 according to Track Data, suggesting larger price fluctuations.
TiVo (NASDAQ: TIVO) calls active as TIVO trades near 10-month high. TIVO, a digital video recorder provider, is recently up 64 cents to $7.01. TIVO has a market cap of $682 million. TIVO September 7.5 calls have traded 25 times on transaction volume of 1,300 contracts above its open interest of 435 contracts. TIVO September option implied volatility of 57 is near its 26-week average according to Track Data, suggesting non-directional risk.
Brinker (NYSE: EAT) volatility up; EAT talking to investors about selling Macaroni Grill. EAT operates restaurant concepts including; Chili's, Macaroni Grill, Maggiono's & On the Border. Goldman Sachs says "EAT reported 4Q operating EPS of $0.57, ahead of our $0.47 estimate. The overage came largely from a lower tax rate, share count, and modest expense variance." Dow Jones reported EAT "is talking with a 'number of investors' about the possible sale of its Romano's Macaroni Grill chain." EAT September option implied volatility of 33 is above its 26-week average of 29 according to Track Data, suggesting larger risk.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Brinker International (NYSE: EAT - option chain) shares are headed lower today. Last week, an analyst expressed concerns about potential weakness in the casual dining sector due to families that may have stayed home to watch Olympic coverage rather than going out for dinner. Today, there is some weakness throughout the sector, on stocks like Darden (NYSE: DRI) and Cheescake Factory (NASDAQ: CAKE) as well. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on EAT.
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Although they spent most of the day in the green the indexes gave up ground through most of the session to close just in the red. 
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