Rating Update: Stock Rating D-Negative (11/8/19)-Texas Roadhouse Inc (TXRH).

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BUSINESS

Texas Roadhouse, Inc., together with its subsidiaries, operates casual dining restaurants in the United States and internationally. The company operates and franchises Texas Roadhouse and Bubba’s 33 restaurants. As of February 20, 2018, it owned and operated approximately 550 restaurants. Texas Roadhouse, Inc. was founded in 1993 and is based in Louisville, Kentucky.
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INVESTMENT RATING

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TXRH is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

Texas Roadhouse has a current Value Trend Rating of D (Negative).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing highly consistent signals. Texas Roadhouse has a slightly negative Appreciation Score of 35 and a slightly negative Power Rating of 34, and the Negative Value Trend Rating results.

Texas Roadhouse’s stock is selling above targeted value. The current stock price of $58.82 compares to targeted value 12 months forward of $54.
This moderately low appreciation potential results in an appreciation score of 35 (65% of the universe has greater appreciation potential.)
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Texas Roadhouse has a Power Rating of 34. (This slightly negative Power Rating indicates that TXRH’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: recent price action has been slightly unfavorable; and earnings estimate behavior for TXRH has been slightly negative recently. An offsetting factor is is currently in a modestly favorable positi.

INVESTMENT PROFILE

TXRH’s financial strength is high. Financial strength rating is 86.
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Relative to the S&P 500 Composite, Texas Roadhouse Inc has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that TXRH is lower risk. The only positive is TXRH low earnings variability. TXRH’s valuation is moderate: moderate dividend yield, high P/E ratio, and moderate price/book ratio. TXRH has unusually low market capitalization.

CURRENT SIGNALS

Texas Roadhouse’s current operations are strong. Return on equity is rising, reflecting: and rising tax keep rate.

Texas Roadhouse’s current technical position is mixed. The stock price is in a 0.7 month up move. The stock has appreciated 20.9% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Texas Roadhouse Inc (NASDAQ: TXRH). Marginal positive changes in fundamentals have recently occurred: the consensus estimate for December, 2019 increased significantly.
The stock is currently rated D.
Texas Roadhouse Inc (NASDAQ: TXRH) stock closed at $0.00 on 11/8/19 after a major increase of 11.1%. However, exceptionally low trading volume at 44% of normal accompanied the advance. The stock has risen 4.1% during the last week but has been weak relative to the market over the last nine months.

CASH FLOW

In 2018, Texas Roadhouse generated a very significant increase in cash of +$59.2 million (+39%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$289.0 million. Non-operating uses consumed -$4.6 million (-2% of EBITDA). Cash taxes consumed -$12.3 million (-4% of EBITDA). Re-investment in the business amounted to -$110.6 million (-38% of EBITDA). On a net basis, debt investors received -$50.6 million (-18% of EBITDA) while equity investors removed -$51.7 million (-18% of EBITDA).
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Texas Roadhouse’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Texas Roadhouse Inc Peer Group as well. In most years, Texas Roadhouse was in the third quartile and second quartile. Currently, Texas Roadhouse is at median at -2% of EBITDA (-$4.6 million).

Texas Roadhouse’s Cash Taxes, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Texas Roadhouse Inc Peer Group. In most years, Texas Roadhouse was in the top quartile. Currently, Texas Roadhouse is upper quartile at -4% of EBITDA (-$12.3 million).

Texas Roadhouse’s Business Re-investment, %EBITDA has suffered a strong overall downtrend over the period. This downtrend was accompanied by stability for the Texas Roadhouse Inc Peer Group. (Since 2015 Business Re-investment, %EBITDA has experienced a very sharp recovery.) In most years, Texas Roadhouse was in the third quartile and second quartile. Currently, Texas Roadhouse is below median at -38% of EBITDA (-$110.6 million).

Texas Roadhouse’s Debt Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Texas Roadhouse Inc Peer Group. (Since 2016 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Texas Roadhouse was in the third quartile and lower quartile. Currently, Texas Roadhouse is lower quartile at -18% of EBITDA (-$50.6 million).

Texas Roadhouse’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Texas Roadhouse Inc Peer Group. In most years, Texas Roadhouse was in the top quartile and second quartile. Currently, Texas Roadhouse is substantially above median at -18% of EBITDA (-$51.7 million).

Texas Roadhouse’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Texas Roadhouse Inc Peer Group. In most years, Texas Roadhouse was in the second quartile and top quartile. Currently, Texas Roadhouse is upper quartile at +20% of EBITDA (+$59.2 million).
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Texas Roadhouse’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Texas Roadhouse Inc Peer Group as well. In most years, Texas Roadhouse was in the third quartile and second quartile. Currently, Texas Roadhouse is at median at +9%.

PROFITABILITY

Texas Roadhouse’s return on equity has improved very significantly since 2009.
This very significant improvement was due to little change in pretax operating return supported by strong positive trend in non-operating factors.
The productivity of Texas Roadhouse’s assets rose over the full period 2009-2019: asset turnover has exhibited a volatile overall uptrend although it experienced a very sharp decline after the 2015 high.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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Texas Roadhouse’s return on equity is at median (18.1%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is below median (10.4%) reflecting asset turnover that is above median (1.42X) and pretax margin at the lower quartile (7.4%).
Tax “keep” rate (income tax management) is upper quartile (83.6%) resulting in after tax return on assets that is slightly below median.
Financial leverage (leverage) is at median (2.08X).

GROWTH RATES

There are no significant differences between Texas Roadhouse’s longer term growth and growth in recent years.
Texas Roadhouse’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 11.4% per year.

Total asset growth has been 10.3% per year. (More recently it has been 14.9%.)

Annual E.P.S. growth has been 13.1% per year.

Equity growth has been 8.3% per year.

Texas Roadhouse’s consensus growth rate forecast (average of Wall Street analysts) is 11.2% — in line with the average of the historical growth measures.
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Relative to the Texas Roadhouse Inc Peer Group, Texas Roadhouse’s historical growth measures are erratic. Total asset growth (10.3%) has been upper quartile. Revenue growth (11.4%) has been at the upper quartile. E.P.S. growth (13.1%) has been above median. Equity growth (8.3%) has been substantially above median.

Consensus growth forecast (11.2%) is slightly above median.
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PRICE HISTORY

Over the full time period, Texas Roadhouse’s stock price performance has been variable and exceptional. Between January, 2009 and November, 2019, Texas Roadhouse’s stock price rose +671%; relative to the market, this was a +106% gain. Significant price move during the period: 1) September, 2011 – July, 2016: +257%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -4.6% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of -4.6% is substantially below median relative to Texas Roadhouse Inc Peer Group.

Current 5-year total return performance of 16.4% is substantially above median relative to the S&P 500 Composite.
Through October, 2019, with substantially above median current 5-year total return of 16.4% relative to S&P 500 Composite, Texas Roadhouse’s total return performance is upper quartile relative to Texas Roadhouse Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, TXRH’s overall valuation is high. The highest factor, the ratio of enterprise value/assets, is near the upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Price/equity ratio is above median. Price/earnings ratio is above median. The lowest factor, the ratio of enterprise value/revenue, is at the lower quartile.
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Texas Roadhouse has a large value gap compared to the median. For TXRH to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.74X to 1.53X. If TXRH’s ratio of enterprise value/revenue were to fall to 1.53X, its stock price would be lower by $-8 to $51.
For TXRH to achieve upper quartile valuation relative to the Texas Roadhouse Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.74X to 1.92X. If TXRH’s ratio of enterprise value/revenue were to rise to 1.92X, its stock price would increase by $7 from the current level of $59.

VALUE TARGETS

TXRH is expected to continue to be an important Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Texas Roadhouse’s current Price Target of $55 represents a -7% change from the current price of $58.82.
This moderately low appreciation potential results in an appreciation score of 35 (65% of the universe has greater appreciation potential.)
Reinforcing this moderately low Appreciation Score of 35, the moderately low Power Rating of 34 contributes to an Value Trend Rating of D.
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Texas Roadhouse’s current Price Target is $55 (+7% from the 2018 Target of $51 but -7% from the 11/08/19 price of $58.82). This slight rise in the Target is the result of a +23% increase in the equity base and a -14% decrease in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a slight positive impact.
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PTR’s return on equity forecast is 15.5% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, steady increase between 2010 and 2018. The current forecast is above the 2011 low of 11%.

PTR’s growth forecast is 13.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2010 peak of 18%.

PTR’s cost of equity forecast is 9.4% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is steady at the 2010 low of 8.6%.
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At Texas Roadhouse’s current price of $58.82, investors are placing a positive value of $33 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 11.0% per year, and a return on equity of 17.4% versus a cost of equity of 9.1%.
PTR’s 2020 Price Target of $55 is based on these forecasts and reflects an estimated value of existing assets of $30 and a value of future investments of $25.

About John Lafferty 52821 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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