This Steakhouse Has Been Sizzling in 2022

If you’re not familiar, the Russell 2000 tracks small-cap stocks in the U.S.

Typically, these aren’t well-known names.

But every once in a while, we find one we recognize in our proprietary sentiment indicator, Trackstar.

Texas Roadhouse (TXRH) didn’t stand out at first.

While financial pros searched for it more than Darden Restaurants (DRI) and Papa John’s (PZZA), there was nothing unusual there…

Search volume spiked when TXRH announced Q3 earnings in late October.

But what caught our attention wasn’t financial pros’ activity, it was retail investors’.

Retail search volume spiked and remained high an entire month.

Which got us wondering if there was something more than meets the eye in TXRH.

Texas Roadhouse’s Business

Texas Roadhouse is a steakhouse chain with nearly 700 locations in 49 states and 10 foreign countries. In addition, the company owns Bubba’s 33, a casual dining bar/restaurant chain with dozens of locations across the U.S. 

A little less than 20% of Texas Roadhouse chains are franchised. The company owns and operates the rest. 

Despite all the mounting economic uncertainty and inflationary pressure, TXRH posted same-store sales growth of 8.2% in Q3 and 30% growth on a three-year stack. 

Moreover, Texas Roadhouse locations averaged more than $129,278 in weekly sales in Q3, with 12.6% coming from to-go sales. 

Some credit its success to the experience it delivers. Others think it’s the quality of its food, which it makes from scratch. 

Source: Texas Roadhouse

Financials

Source: Stock Analysis

Like many restaurant chains, TXRH had a hard year in 2020.  

Its net income went from $174.4 million in 2019 to $31.26 million in 2020 but roared back to $245.2 million in 2021. 

Over the last 12 months, net income climbed to $256 million. 

The company’s operating cash flow has gone from $286.3 million in 2017 to $468.8 million in 2021. Currently, it’s $515.1 million. 

TXRH has $185.3 million in cash and $772.7 million in debt. 

While its current ratio of 0.5x may concern some investors, the company pays an annual dividend of $1.84, a yield of 1.93%. 

Valuation

Source: Seeking Alpha

TXRH trades at a price-to-cash-flow ratio of 12.7x, notably lower than its peers Dutch Bros (BROS) at 189x, The Wendy’s Company (WEN) at 19.4x, Wingstop (WING) at 101.6x, and PZZA at 43.4x. 

Moreover, TXRH trades at a price-to-sales ratio of 1.7x, significantly lower than its rivals aside from PZZA at 1.4x.  

On the other hand, BROS is at 2.7x, WEN is at 3x, and WING is at 15x. 

Meanwhile, TXRH has a P/E GAAP ratio of 25.6x, considerably lower than other restaurants with similar market caps. This at least points to the stock being a relative bargain.

WEN trades at a P/E GAAP ratio of 26.7x, WING at 115.6x, and PZZA at 44x. BROS isn’t even profitable. 

Profitability

Source: Seeking Alpha 

Texas Roadhouse had a 26-basis-point drop in restaurant margin in Q3. Commodity inflation and wage and labor inflation negatively impacted it. 

But it offset some of that with an increase in comparable restaurant sales. 

TXRH runs an EBIT margin of 8.1%, which is higher than PZZA at 7.6% and BROS at -2.2%, but it lags WEN at 19.9% and WING at 24.1%. 

TXRH boasts an impressive 6.7% net income margin, notably higher than BROS at -0.88% and PZZA at 3.2%, but not as strong as WEN at 11.5% or WING at 13%. 

Texas Roadhouse said it wouldn’t compromise by offering smaller portions or reducing staff and instead focuses on service and experience.

Growth

Source: Seeking Alpha 

From 2010 to 2019, TXRH shares appreciated more than 400%.

The company’s quarterly revenues grew 14.3% in Q3, and quarterly earnings grew 18.5% YoY. 

Revenue grew 21.6% YoY, significantly more than WEN at 7.6%, WING at 18.6%, and PZZA at 4.75%, but not as strong as BROS at 51.2%. 

The open question is whether consumers will continue to spend on dining experiences.

Our Opinion 5/10

Most economists predict a recession in 2023, which should negatively impact TXRH shares. 

While we believe TXRH is an excellent company doing all the right things, we’d be patient and wait for a better entry. 

We’d buy if shares got down to the $80-$85 range.