Restaurant stocks have fallen out of favor of late because of declining revenue trends at a number of key operators. Yet not all chains are suffering. Texas Roadhouse (TXRH) has a formula that keeps it on a good growth track.
The Louisville, Ky.-based company has reported record quarterly same store sales growth for more than six years. Texas Roadhouse has taken advantage of changing consumer preferences for fast casual dining. In the company's own words:
"We like to brag about our Hand-Cut Steaks, Fall-Off-The-Bone Ribs, Made-From-Scratch Sides, and Fresh-Baked Bread. Everything we do goes into making our hearty meals stand out. We handcraft almost everything we serve. We provide larger portions so you get more food for your dollar."
Hand-crafted food makes it taste more like they're from a community restaurant than a chain. In a way, that's how the company views itself. You don't see national sales advertisements for this outfit. Instead, it focuses on local involvement, both as a company and through individual volunteering.
Texas Roadhouse keeps in touch with its regular guests through social media. It also generates strong return visits due to its reasonably-priced menu.
Texas Roadhouse has built a consistently strong financial record since 2004. It's the rare company that has generated higher revenues and earnings per share each year of its public life, even during the deep recession. Profits per share rose nearly four times over the first decade and have continued to move ahead smartly ever since.
The company has a positive net cash position while carrying only $50 million in debt, despite a strong expansion profile. Net profit margins have rise from 5.7% to 6.8% over the past decade and have considerable room for future improvement. Return on capital is expected to hit 16% this year, a respectable and increasing level.
Another positive is its potential for growth. Although Texas Roadhouse has restaurants in 49 states, that represents an average of just a little more than 10 per state. There remains room for further expansion. Also, the company now offers a smaller store layout targeted at medium-sized communities.
In addition, Texas Roadhouse started a promising new concept, Bubba's 33, in earnest this year. This is a family-friendly sports chain that will increase from two stores to 10 in 2016. If the rollout goes well, expect this second concept to gain momentum and add to future profitability.
With a market capitalization recently exceeding $3 billion, Texas Roadhouse is likely to garner increased support from institutional investors. It's encouraging that management owns 7.4% of the equity; that's a significant stake in the company's success.
The company is trading 10% below its 52-week high. If you're a long-term investor, it would make sense to buy shares of this well-run restaurant operator.