Bloomin' Brands: A 33% Overvaluation at $8.73—Is the Market Mispricing a Restaurant Chain's Recovery?

The restaurant industry has long been a battleground for valuation debates, and Bloomin' Brands (NASDAQ:BLMN) is no exception. Currently trading at $8.73 per share, the stock appears to be priced 33% above its intrinsic value of $6.55, according to a 2-stage discounted cash flow (DCF) model. This valuation discrepancy raises critical questions: Is the market overestimating Bloomin' Brands' recovery potential, or is there a hidden catalyst that justifies the premium?

The 2-Stage DCF Model: A Tale of Two Phases

The DCF model divides the company's cash flow projections into two distinct phases: a near-term period of volatile growth and a long-term stable-growth phase. For Bloomin' Brands, the first stage (2026–2030) assumes a declining free cash flow (FCF) as the company grapples with operational challenges, while the second stage (2031 onward) reflects a stabilized cash flow environment.

Key Assumptions and Inputs:
1. Revenue and Margins: Bloomin' Brands reported a 4.8% revenue decline in 2024, driven by lower comparable restaurant sales and restaurant closures. The company's 2025 guidance projects a modest recovery in U.S. comparable sales (between -2.0% and flat) and adjusted diluted EPS of $1.20–$1.40. These figures suggest a cautious optimism but underscore the company's struggle to regain momentum.
2. Capital Expenditures (CapEx): The company plans to invest $190–$210 million in 2025 for new restaurant openings, signaling a commitment to growth despite a leveraged capital structure. Total debt has risen to $1.03 billion, with a WACC of 5.08% (calculated using a cost of equity of 12.616% and a cost of debt of 2.6341%).
3. Discount Rate: The WACC of 5.08% reflects the company's high debt load and the risk premium demanded by investors for its volatile stock (beta of 1.40).

The Valuation Gap: $8.73 vs. $6.55

The DCF model projects Bloomin' Brands' intrinsic value at $6.55, while the stock trades at $8.73. This 33% premium implies that the market is pricing in a recovery that may not materialize. The disconnect arises from several factors:

1. Declining Free Cash Flows: The company's projected FCF from 2026 to 2035 shows a steep decline, from $104 million in 2026 to $32.5 million by 2035. These figures, when discounted at 5.08%, yield a present value of $428 million for the 10-year period. Even with a terminal value assumption, the intrinsic value remains below the current market price.
2. Debt Load and Liquidity Risks: Bloomin' Brands' total debt of $1.03 billion (up from $780 million in 2023) raises concerns about its ability to service interest expenses, particularly in a high-inflation environment. The company's negative working capital ($631.8 million as of 2024) further complicates its liquidity position.
3. Overly Optimistic Growth Assumptions: The market may be overestimating the company's ability to reverse its declining margins and restore profitability. While the CEO has emphasized strategic initiatives like franchise expansion and cost-saving measures, these efforts face headwinds from rising commodity and labor inflation (projected at 2.5–3.5% and 4–5%, respectively).

Is the Overvaluation Justified?

The 33% premium could be rationalized if Bloomin' Brands successfully executes its turnaround plan. The company's recent actions—including the divestiture of 67% of its Brazil operations and the shift to a franchise model—aim to reduce debt and focus on core markets. Additionally, the reopening of 18–20 company-owned restaurants and 30 franchised locations in 2025 could drive revenue growth. However, these initiatives require time to bear fruit, and the market may be discounting near-term risks too aggressively.

Investment Implications:
- Short-Term Caution: The current valuation reflects a premium for a recovery that is not yet evident in the company's financials. Investors should monitor the 2025 guidance for U.S. comparable sales and adjusted EPS to assess progress.
- Long-Term Potential: If Bloomin' Brands can stabilize its margins and reduce debt, the intrinsic value could converge with the market price. The company's iconic brand equity and strategic focus on franchise growth provide a foundation for long-term value creation.

Conclusion: A High-Risk, High-Reward Scenario

Bloomin' Brands' 33% overvaluation at $8.73 is a cautionary tale for investors. While the company's strategic initiatives and brand strength offer hope, the financials paint a picture of a business in transition. The DCF model's $6.55 fair value suggests that the market is pricing in a recovery that may take years to materialize—or may not occur at all. For risk-tolerant investors, this could be an opportunity to buy into a turnaround story, but it requires patience and a close watch on execution. For others, the premium may be too high to justify the risk.

In the end, the question is not just about the numbers but about the company's ability to adapt. As the restaurant sector evolves, Bloomin' Brands' success will hinge on whether it can reinvent itself as a leaner, more profitable entity—or remain a cautionary tale of overvaluation.