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Texas Roadhouse (NASDAQ:TXRH) has long been one of my favorite restaurant stocks. For years, the company has outperformed benchmarks and continued to improve comparable sales and margins, driving profits in the process. The enormous market selloff earlier this year saw Texas Roadhouse lose about two-thirds of its market value, but in the interim, the stock has doubled. The way I see it, Texas Roadhouse is now right back to pricing in normalized growth, and for that reason, for the first time in a while, I don’t see it as a buy.

Lots of good points, but the landscape has changed

Texas Roadhouse has performed well in the current environment as it quickly pivoted to a family-style takeout menu. Indeed, I’ve been to Texas Roadhouse a few times since quarantine began, and the one I go to has been very busy, so I’m not surprised the company has been able to keep cash burn to a minimum.

Texas Roadhouse also maintains a net cash position on its balance sheet, as cash outweighs debt. With untapped liquidity and a net cash position, plus limited cash burn, thanks to relatively strong sales, TXRH is more than adequately prepared to make it through the crisis. This isn’t necessarily the case with all restaurant operators, so it is worth noting.

Over the years, Texas Roadhouse has managed to absolutely crush it in terms of top-line growth.

Source: Seeking Alpha

Revenue was $1.8 billion five years ago, and last year, was $2.8 billion. That’s an astonishing rate of growth for a restaurant chain, and much of it came in the way of comparable sales gains.

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We can see the same-store sales growth for Texas Roadhouse above, with each of the past three years coming in at 5%. These sales gains are the most desirable because additional leverage from existing stores means better margins. As unit revenue rises, fixed expenses like labor, rent, etc. are leveraged down as a percentage of revenue. That’s part of the reason why Texas Roadhouse has been so successful; rising comparable sales mean margins increase more quickly than revenue in most cases.

The decline this year is currently expected to be 16%, followed by a rebound of 19% into next year. Interestingly, that rebound is really just a retracement of expected losses this year, so it appears that I’m not the only one who thinks Texas Roadhouse has a protracted road to recovery in front of it.

The things that afforded Texas Roadhouse this success historically like its menu, atmosphere, and customer service haven’t changed. What has changed is that there are tens of millions of people in the US who are unemployed who weren’t a few months ago. While the worst is behind us in terms of job losses, a lack of job losses is not the same thing as job gains. With so many people out of work, one wonders how the restaurant industry will be able to maintain some sort of normal as unemployed people probably don’t have eating at a restaurant high on their priority list.

We can see the impact of this on Texas Roadhouse’s revenue estimates above, and earnings estimates below.

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Source: Seeking Alpha

EPS is expected to be negative this year, although only slightly. We all know this year is a bust due to circumstances out of its control, so I’m not sure whether the company ends up posting a small loss or small profit is really of any consequence. Looking into next year, when you’d expect some normalization, I’m not sure the rebound is quite large enough to warrant the current share price.

The current expectation is for $2.07 in EPS next year, which is a significant decline from 2019’s level of $2.46. In other words, with revenue expected to recover all of 2020’s losses next year, profit isn’t expected to be all that close to 2019. That implies margins are suffering, and I’d believe it.

Additional cleaning procedures, reduced operating hours, supply chain disruptions and other factors are all weighing on restaurants today, including Texas Roadhouse. Keep in mind also that if I’m right and overall restaurant spending dollars decline, operators may need to start competing on price more than they have in the recent past. That’s bad news for revenue and margins as well.

I still think this company is one of the best restaurant operators around, but that doesn’t make it immune to widespread shutdowns and huge job losses.

The valuation is pricing in too much

While I think Texas Roadhouse will come out of this crisis in better shape compared to its competitors than it went in, I am still cautious today. There is a lot that can happen between now and two or three years from now when normalized earnings may or may not return, but the stock is pricing that in as though it is an inevitability, rather than a possible outcome.

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Shares trade today for an eye-watering 24.6 times next year’s estimate of $2.07 in EPS. For some context, Texas Roadhouse was expected to hit $2.75 in EPS this year before the COVID-19 crisis, and traded with an average valuation before the crash of ~22.5 times that value. That valuation was during what could easily be considered boom times for Texas Roadhouse, and the current valuation is a ~10% premium to it.

While I don’t doubt that Texas Roadhouse can continue to perform well relative to its competitors, I wonder just how many dollars will be spent on restaurants in the coming years with so many millions of people out of work. Unprecedented stimulus dollars would have supported restaurant sales in the past couple of months, but with that drying out, I think we’ll see the true reality for restaurants in the coming months. That’s bad news for the sector, and with Texas Roadhouse pricing in so much growth already, I think you’ll get a shot to buy it at a better valuation than you can today.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.