UPDATE: Goldman Sachs Starts Bloomin' Brands (BLMN) at Conviction Buy

Goldman Sachs initiated coverage on Bloomin' Brands (NASDAQ: BLMN) with a Conviction Buy rating and a price target of $28, suggest upside of 33%. Analyst Karen Holthouse thinks casual diners have better financial leverage to a recovery than other consumer sectors, and she sees opportunity for comp upside at Bloomin' Brands from Outback's lunch rollout, as well as potential margin gains from a number tailwinds.

"We see expanding lunch penetration, underlying brand momentum, and early technology initiatives driving comp upside, with additional margin upside provided by a favorable mix shift towards Brazil, underappreciated cost opportunities, and signs of easing beef prices. Valuation is also compelling with BLMN trading near relative lows vs. the casual dining group and the S&P 500, and a SOTP of the US and Brazil businesses implying a US multiple below all casual peers," said Holthouse.

"Over the past several years Outback has rolled weekday lunch to about three fourths of the system, and, even before national ad support started in late 2Q, our proprietary survey showed a 40% increase in consumer acceptance of lunch in the past year. A model of the comp benefit of lunch suggests it can add 463bps to the two-year comp stack by 3Q15 vs. only 228bps in 1Q," continued the analyst.

Holthouse added, "Our survey shows a steady improvement in Outback’s value proposition (even vs. other steak players who also benefit from grocery beef inflation), steady improvements in traffic, and growing resonance with Millennials. We see the latter only improving as BLMN makes initial inroads in digital initiatives, starting with an online/mobile queue that allows users to time their arrival to table availability."

"Brazil is a favorable mix shift, GS agriculture analysts expects beef prices to start to reset in 2H15, and an analysis of ongoing cost savings suggests the opportunity for 140bps+ of structurally higher margins in a more normalized beef environment. Despite these tailwinds, consensus is building in margin compression over the next several years."

For an analyst ratings summary and ratings history on Bloomin' Brands click here. For more ratings news on Bloomin' Brands click here.

Shares of Bloomin' Brands closed at $21.35 yesterday.

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