Under-the-Radar Restaurant Stock Outperforms
BOSTON (TheStreet) -- Texas Roadhouse (TXRH) - Get Report is a little-known casual-dining chain that increased sales and opened outlets during the Great Recession.
While the
Dow Jones Industrial Average
is still far away from its peak, Texas Roadhouse's stock has delivered average annual gains of 10% since 2007. There may be more to come, according to the company's largest shareholders.
Founded in 1993 in Louisville, Kentucky, Texas Roadhouse specializes in Western-themed food, namely, steaks and ribs. The company has expanded rapidly, despite economic recessions in the late '90s, following the dot-com bubble, and in 2007, after the countrywide real estate collapse. Amid business contractions, Texas Roadhouse has grown from one restaurant to more than 300 in 46 states.
Texas Roadhouse has increased sales 12% annually, on average, since 2007 while boosting earnings per share 15% a year. With a market value of $1.1 billion, Texas Roadhouse is still flying under the radar. It's one of the
TheStreet's
top-ranked restaurant stocks.
As a moderately priced restaurant chain, Texas Roadhouse's competitors include
Cheesecake Factory
(CAKE) - Get Report
and
P.F. Chang's
( PFCB).
However, Texas Roadhouse is more value-oriented than the aforementioned chains, which are usually ensconced in high-end shopping centers. Its quarterly comparable-store sales climbed 4.3% at company-owned locations and 4.4% at franchises. Total sales climbed 12%. Net income rose 13% to $14 million and earnings per share gained 15% to 19 cents. Margins hitched a ride on traffic. The quarterly gross margin extended from 18% to 19% and the operating margin inched up from 7.6% to 8.7%. Economic trends suggest that Texas Roadhouse may still be growth-poised. Americans are actively deleveraging.
The national savings rate crept past 5% in early 2009 and has remained between 5% and 6% since. In the third quarter, it declined marginally and, in October, consumer confidence, as measured by the
Conference Board
and the University of Michigan, gained more than expected. Personal consumption also improved. Although there are signs of growing consumer spending, the savings rate is likely to remain elevated as consumers undergo balance sheet repair. Restaurants are finding it hard to lure patrons with the jobless rate still stuck at 9.6%. However, more cavalier, but still price-conscious, families are more likely to frequent Texas Roadhouse than ritzier chains. A low-priced kids' menu is an incentive for parents.
Texas Roadhouse has opened seven company-owned restaurants and one franchise in 2010. It's actively strengthening its balance sheet, a practice now not-so-affectionately termed self-insuring. The sharp recession has reminded American managers that liquidity is king amid downturns. In the third quarter, Texas Roadhouse boosted its cash balance 18% to $55 million while trimming its debt load 39% to $62 million. A debt-to-equity ratio of 0.1 demonstrates management's fiscal prudence. It also offers investors a margin of safety. Texas Roadhouse is currently forecasting moderate 2011 earnings per share growth of 5% to 15%.
Although not cheap in an absolute sense, Texas Roadhouse trades at a sizable discount to restaurant peers. It sells for a trailing earnings multiple of 20, a forward earnings multiple of 17, a book value multiple of 2.3, a sales multiple of 1.2 and a cash flow multiple of 9.4 -- 52%, 39%, 62%, 61% and 28% discounts to industry averages. Although Texas Roadhouse isn't a meteoric growth stock, it has a sustainable expansion strategy and a rapidly improving balance sheet. As far as restaurant investments go, it's far less-touted and less-expensive than growth darlings
Panera Bread
(PNRA)
and
Chipotle Mexican Grill
(CMG) - Get Report
.
TheStreet's
alpha-seeking model ranks it higher than both stocks.Of analysts following the company, nine rate its stock "buy" and eight rank it "hold." None rank it "sell." A median target of $17.09 suggests an impending 12-month return of 7.3%.
Credit Suisse
expects the stock to rise 19% to $19.
RBC Capital Markets
predicts a gain of 13% to $18.
Top shareholders are bullish. Of Texas Roadhouse's 30 largest investors, 22, including
Invesco
and
BlackRock
, increased stakes during the latest quarter as two held steady and six lessened holdings. Analysts' cautious optimism has recently been too modest. Texas Roadhouse has an average earnings surprise of 7.9%. It has exceeded consensus earnings estimates in nine of the past 11 quarters. It exceeded by a double-digit percentage in eight of those.
-- Written by Jake Lynch in Boston.
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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
