Texas Roadhouse: My Go-To Restaurant Stock Right Now (NASDAQ:TXRH)

Texas Roadhouse (NASDAQ:TXRH) is a high quality restaurant company. Even after the significant rise in stock price of ~35% over the last year, I personally think the company has till room to grow.

Business Overview

Texas Roadhouse is a US-based casual dining chain operating primarily in the United States. They specialize in steaks and promote a southwestern theme. Texas Roadhouse differentiates itself from its competitors through its made-from-scratch food, distinctive ambiance, and service.

SWOT Analysis

To get a better understanding of the different factors that might impact TXRH’s business, I like to construct a small SWOT Analysis, which helps us understand a few key factors.

Strengths

Brand Reputation: Texas Roadhouse is well-known for its dedication to high-quality food and a lively ambiance, which has contributed to the establishment of a strong brand reputation in the eating industry.

Unique Dining Experience: The restaurant company distinguishes itself from competitors by providing a one-of-a-kind dining experience with hand-cut steaks, fall-off-the-bone ribs, and made-from-scratch sides. The motif of the restaurants, which are frequently decorated with western artifacts, also adds to their attractiveness.

Employee Management: Texas Roadhouse prioritizes employee satisfaction and training, resulting in great service and a low turnover rate when compared to industry averages.

Strong Financial Performance: TXRH has continually generated good financial results with constant revenue growth, allowing it to spend in expansion, innovations, and improving customer experience.

Community Involvement: The company actively participates in community service and charity events, enhancing its public image and cultivating strong community partnerships.

Weaknesses

Limited International Presence: Texas Roadhouse is primarily found in the United States, with only a few international locations. This limited geographical presence limits its capacity to reach a bigger consumer base and makes it more vulnerable to market volatility in the United States.

Limited Menu Diversity: While Texas Roadhouse’s emphasis on steaks and ribs is a strength, it is also a disadvantage. The restaurant chain’s strong meat-centric food may not appeal to vegetarians, vegans, or others with special dietary needs, which seem to be a trend lately.

Dependence on Franchisees: The franchise model is important to Texas Roadhouse’s business model. Franchisee underperformance or noncompliance may harm the brand’s reputation and financial health.

Opportunities

International Expansion: Texas Roadhouse has a lot of room to grow abroad, especially in emerging economies where the desire for American-style dining is expanding.

Menu Diversification: There is room to expand the menu to include more plant-based options or dishes that accommodate dietary constraints. This can help you reach a larger customer base.

Digital Innovations: Embracing technological improvements like as mobile orders, delivery choices, and loyalty programs may improve customer experiences and encourage revenue growth. However, it is critical to maintain the distinct ambiance that distinguishes a Texas Roadhouse dining experience.

Sustainable Practices: Implementing more sustainable procurement, waste management, and energy usage methods could reduce the company’s environmental footprint and appeal to environmentally sensitive customers..

Threats

Competitive Market: The restaurant industry is highly competitive, with numerous other chains providing similar services. This competition could affect Texas Roadhouse’s market share and profitability.

Fluctuating Commodity Prices: The restaurant sector is highly competitive, with many rival chains offering comparable services. Texas Roadhouse’s market share and profitability may suffer as a result of this rivalry.

Regulatory Changes: Changes in food and safety regulations or labor legislation may result in increased operational costs and stricter compliance requirements.

Economic Uncertainties: Economic downturns or moments of uncertainty can have an impact on consumers’ discretionary expenditure, influencing how frequently they dine out.

Health Conscious Trends: As more people adopt healthy eating habits, demand for high-calorie or meat-centric dishes may fall, hurting Texas Roadhouse’s sales.

Valuation

We’ll start things of with the Outlook for 2023, to get a understanding what the management of Texas Roadhouse is planning for the remainder of the year.

Outlook for 2023

According to latest quarterly report, comparable sales at company-operated restaurants increased by 8.6% during the first five weeks of Q2 2023, compared to the previous year. In addition, a 2.2% menu pricing increase went into effect in late March. Looking ahead to the rest of 2023, management predicts further good increase in comparable restaurant sales, owing in part to menu pricing changes. The business also intends to open 25 to 30 new Texas Roadhouse and Bubba’s 33 corporate restaurants, as well as a 6% increase in store weeks, when newly acquired franchise sites are factored in.

Discounted Cash Flow Analysis

To valuate TXRH, I conducted a Discounted Cash Flow Analysis (DCF), to properly predict a suitable share price for the company. The metrics stated below are relatively conservative to gain another margin of safety. The analysis’s blue cells show the presumptions that were used to valuate TXRH.

• Revenue: The revenues were predicted with using a 12% revenue CAGR till 2030. This resembles pretty much management’s guidance and it’s 10 year revenue CAGR, which currently sits at 12.5%

• EBIT Margin: For the EBIT margin I used the average of the last 3 years and anticipated that it will stay flat at 8.3% for the next 8 years.
• Financial Result And Taxes: I averaged the values of the last two years – purposely leaving out 2020 and Covid – and therefore used -34% to calculate the Net Profit for the years 2023 to 2030.
• Tax Rate: The tax rate used for this DCF is 14%, right at management’s guidance for 2023.
• Free Cash Flow: I calculated the EBIAT using the aforementioned tax rate and then attempted to estimate an appropriate EBIAT to FCF ratio. In that situation, 3.6% – the average of 6.3% in 2021, 0.8% in 2022 – seems realistic.
• WACC: I used the medium of TXRH’s current WACC of 9%.
• Perpetuity Growth Rate: The perpetuity growth rate assumed for the analysis is 3%.

This analysis gives us a target share price of $126.24. With considering this and assuming TXRH’s business will develop like we predicted, there is currently a potential upside of ~14%.

Conclusion

Based on our reasonable conservative Discounted Cash Flow analysis we currently get a margin of safety of around 15%.

While Texas Roadhouse has experienced a significant jump in performance over the past year, appreciating nearly 35%, it still presents a compelling investment opportunity at the time, leading me to rate the company as a ‘Buy’. Nonetheless, the current undervaluation isn’t as significant as it once was, so I’d recommend building or expanding your position as soon as possible, as the corporation may soon close this valuation gap.