Texas Roadhouse Inc (TXRH) and More: Is a Casual Dining Recovery Under Way?

Companies such Red Robin, which boast generous buyback programs, often use share repurchases to drive earnings-per-share expansion. Savvy investors, however, know that shares repurchased above fair value are value-destructive, and shares repurchased below fair value are value-creative. Red Robin’s stock price bounced within the boundaries of our fair value range for most of 2012, so we view the repurchases as value-neutral.

Regardless, Red Robin is poised to have a strong 2013, with the firm anticipating same-store sales growth of 2.5%-3%. Restaurant operating margins are expected to be flat to down only 10 basis points from the 2012 level of 20.7%. Therefore, we could see a substantial rise in earnings. SG&A at the corporate level is expected to remain flat, but again, company-owned restaurant chains can see wild swings in profitability, as explained in the press release:

“The sensitivity of the company’s earnings per diluted share to a 1% change in guest counts for fiscal 2013 is estimated to be $0.23 on an annualized basis. Additionally, a 10 basis point change in restaurant-level operating margin is expected to impact earnings per diluted share by approximately $0.05, and a change of $187,000 in pre-tax income or expense is equivalent to approximately $0.01 per diluted share.”

Though we think free cash flow will be solid in 2013, the company will spend $50 million to $55 million on capital investments, opening 20 new restaurants and devoting significant resources to improve menu choices. Red Robin has some compelling growth markets (Florida, New York, New Jersey, Chicago, Texas) that could help drive strong earnings growth in the years to come. Nevertheless, we at Valuentum believe shares of Red Robin are starting to look rich at current levels, and we do not believe the name warrants a position in the portfolio of our Best Ideas Newsletter.

The article Is a Casual Dining Recovery Under Way? originally appeared on Fool.com and is written by RJ Towner.

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