Texas Roadhouse (TXRH) has been outperforming the stock market without as much fanfare as fast food giants like Chipotle (CMG). The steakhouse chain’s stock has tripled over the past five years and presents a reasonable valuation for patient investors. I am bullish on Texas Roadhouse due to its rising revenue and profit margins.
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Comparable Sales Are Booming
Texas Roadhouse operates company-owned restaurants and franchises for its brands, and both have seen higher comparable sales. Company-owned restaurants reported 9.3% year-over-year comparable sales growth, while franchises’ comparable sales were up by 8.3% year-over-year in the second quarter.
The positive narrative continues with Texas Roadhouse’s revenue and net income growth. The company reported a 14.5% year-over-year revenue growth in the second quarter compared to 13.5% year-over-year revenue growth over the year’s first six months. Net income acceleration was more dramatic, up by 46.0% year-over-year in the second quarter compared to a 38.4% year-over-year improvement in the first six months of the year.
International Expansion
While growth has looked promising in recent quarters, it’s important to remember that Texas Roadhouse is just starting its international expansion. The company has 53 international franchise locations, up by 29% year-over-year. It’s the company’s fastest-growing segment. In addition, Texas Roadhouse closed the quarter with 762 total restaurants, up 7% year-over-year. All this means that TXRH has plenty of room to grow and increase it’s profitability.
Comparison to Other Companies in the Sector
To get a full appreciation of TXHR stock, we should examine other players in the industry. Texas Roadhouse’s solid growth rates come as fast food giants like McDonald’s (MCD) reported declining revenue or lower growth rates than in previous quarters.
Also, Texas Roadhouse is valued at a reasonable 30 P/E ratio, especially compared to Cava (CAVA), which trades at a 245 P/E ratio.
Both companies have market caps of roughly $11 billion. However, Texas Roadhouse reported more than four times more revenue in Q1 than Cava did during the same stretch. Texas Roadhouse’s profits were also ten times higher than Cava’s Q1 profits. Texas Roadhouse also reported much higher comparable sales growth than Cava’s 2.3% year-over-year growth in this area.
Investors can still capitalize on growing fast-food restaurants without contending with an exorbitant valuation. Texas Roadhouse’s 46.0% year-over-year net income growth makes the 30 P/E ratio look more attractive.
Dividend Growth
Texas Roadhouse isn’t only beating the stock market while presenting a reasonable valuation. It’s also a dividend growth stock with a 1.46% yield. The present yield is respectable, and double-digit annualized growth over several years offers additional optimism.
The steakhouse chain recently raised its quarterly dividend from $0.55 per share to $0.61 per share. That’s a 10.9% year-over-year increase. Also, Texas Roadhouse has only a 42% dividend payout ratio and has consecutively raised its dividend each year for over a decade. TXRH’s net income growth supports elevated dividends in the future.
Is TXRH Stock a Buy, According to Analysts?
Wall Street analysts have rated Texas Roadhouse stock as a Moderate Buy with a projected 6% upside from current levels. The stock has 20 ratings, including 10 buy and 10 hold ratings.
Some Wall Street analysts are more optimistic than others, but the highest price target is currently $191. This price target implies a 14% upside from the current price point.
The Bottom Line on Texas Roadhouse Stock
As stated at the beginning, I am bullish on TXRH stock. It trades at a reasonable price relative to its financial growth rates, and comparable sales increased by 8.0% year-over-year in the first four weeks of Q3 of fiscal 2024.
Furthermore, the steakhouse chain’s growth is likely to continue, which means consistent dividend hikes for long term investors. While domestic growth remains strong, international growth is just getting started. The company only has 53 international locations, which gives it plenty of opportunities to expand.
Many high-growth fast-food restaurant chains have outperformed the stock market in recent years, but most of those same picks have excessive valuations that do not present any margin of safety. Texas Roadhouse is an exception to the rule and a good blend for investors seeking growth and value.
