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Texas Roadhouse Inc: Should You Trust a Cheap Steak?

Texas Roadhouse Inc (NASDAQ:TXRH) owned 294 restaurants at the end of 2011 and licensed 72 others. The stock is up 17% this year and is up 36% over the last five years against an S&P 500 index that has just about recovered its losses. Primarily under the Texas Roadhouse steakhouse banner but also owning a small number of Aspen Creek restaurants, the company offers sit-down casual dining. Much of the heat in the restaurant industry recently has been in quick service restaurants, with the IPO of Burger King as well as the rise and correction of Chipotle Mexican Grill Inc (NYSE:CMG). Full-service restaurants, seen as more tightly tied to the economy, have not gotten as much attention as investors have worried about consumer spending. As a result, Texas Roadhouse Inc’s valuation- currently a $1.2 billion market cap- has not received as much scrutiny as perhaps it should.


Texas Roadhouse filed its 10-Q for the second quarter in early August, reporting excellent results. Revenue increased by 15% compared to the second quarter of 2011, and for the first half of the year it is up 15% as well. Over the first half of 2012 earnings per share have risen 12%, and a rise in cash flow from operations has allowed more capital expenditures. So far this year the company has opened 15 new restaurants, and according to its figures same-store growth in the first half of the 2012 was 5%. Texas Roadhouse Inc also approved a share repurchase program in February of this year, though no shares had been repurchased as of the end of the second quarter. This growth has occurred despite consumer deleveraging, suggesting that unless there is a severe downturn in the economy the company should continue to be able to open new value-creating locations.

The trailing earnings multiple for Texas Roadhouse Inc (NASDAQ:TXRH) is 19. The sell-side expectations of a 12% increase in earnings per share in 2013 compared to 2012 represents only a small increase over 1H 2012 annualized. The stock’s forward P/E is 15. Considering the moderate growth opportunities the company has, its historical success in making that growth profitable in an uncertain economic environment where many consumers are cutting back on spending, and a 2.1% dividend yield, the stock seems a bit underpriced. The primary concern we have is the effects of commodity prices driving up the price of beef, and therefore the price of steak relative to culinary alternatives.

Two large hedge funds added to their holdings of Texas Roadhouse Inc (NASDAQ:TXRH) in the second quarter. Billionaire Ken Griffin’s Citadel Investment Group finished June with 2.6 million shares of the restaurant, which represented a 25% increase compared to the beginning of April (find more stock picks from Citadel Investment Group). SAC Capital Advisors, managed by fellow billionaire Steve Cohen, reported owning 1.7 million shares (see what else SAC has been buying).

The closest peers for Texas Roadhouse are fellow full service restaurant BJ’s Restaurants (NASDAQ:BJRI) and holding companies Brinker International (NYSE:EAT) and Darden Restaurants (NYSE:DRI). Brinker operates Chili’s and Maggiano’s while Darden operates Red Lobster, Olive Garden, and steakhouses LongHorn Steakhouse and Capital Grille. BJ’s stock has not done well this year, down 8%; its earnings have been growing but it still trades at 35 times trailing earnings and 26 times forward earnings estimates. Brinker and Darden are having great years, up 29% and 18% respectively, off of quarterly earnings growth of 12% and 10% in their most recent quarter. These companies are also larger and may not have as many growth opportunities going forward as Texas Roadhouse (though, of course, Darden can easily saturate the same geographic market with multiple concepts). Brinker trades at 18 times trailing earnings (13 on a forward basis) while Darden is cheaper at a trailing P/E of 15 and a forward P/E of 12. Brinker is about even with Texas Roadhouse on a dividend yield basis while Darden pays a higher 3.7% at current prices. We think these latter two peers and Texas Roadhouse are good buys; Darden is probably best on a value basis, but Texas Roadhouse as a smaller company that has an attractive growth story.

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