Berko: Texas Roadhouse stock not as good as its steak
Friday, October 18, 2013 7:00 AM
Dear Mr. Berko:
Please give me your opinion of Texas Roadhouse restaurants. Would you buy the stock at the current price?
D.B., Vancouver, Wash.
I like Texas Roadhouse Inc. (TXRH-$26.22); however, I admit that my opinion is based more upon its killer ribs, macho Texas red chili, piquant fried pickles, succulent grilled pork chops, tender steaks, gustable hand-battered golden fried onion rings and ambrosial desserts. I’ve sampled the TXRH menu in Florida, Colorado, Minnesota, Texas, Kansas, Montreal and Monterey, and my only disappointment was a grape ice cream! Grapes go well in jellies, sodas and ice pops, but they don’t seem to be popular in cakes, pies or ice creams.
TXRH has 405 locations (and growing), which offer well-presented large portions of modestly priced lunches and dinners in 7,000 square feet with exceptional service and a rustic ambience. The low $16.44 average check purchases superb food and impressive service, and it certainly encourages repeat customers. And some of those repeat customers insist the wait staff is taking happy pills just as TXRH opens for business. Frankly, I’d rather dine at a TXRH than I would at one of those fancy places where they don’t cook the green beans but they cook the tomatoes.
Kent Taylor, the company’s chairman and CEO, owns more than 6 million of the 70 million outstanding shares, and he has done a yeoman’s job of building TXRH from a concept in 1992 to his first restaurant in Clarksville, Ind., in 1993 to 405 locations today, each employing about 100 people. He drives 35,000 miles a year searching for new locations, visiting his 405-unit empire and disguising himself with a dirty T-shirt, a sweat-stained hunting cap and buck teeth. TXRH is a remarkably well-run casual dining restaurant. And this year, Taylor expects to open locations in Kuwait City and Jeddah, Saudi Arabia, on the Red Sea, where I sure hope he disguises the pork chops.
TXRH came public in 2004 at $20, producing revenues of $360 million and earnings of 25 cents per share, and split 2-for-1 the following year. In 2011, revenues were $1.1 billion, and TXRH earned 88 cents a share. That’s when the board declared its first dividend of 32 cents. This year, TXRH expects to retail $1.4 billion of viands and victuals, earn $1.15 a share and pay its third annual dividend of 48 cents. However, a major concern is that casual restaurants are susceptible to declines in consumer spending, especially in a weakened economy with falling spendable incomes. And there’s concern that health and dietary issues may cause a shift in consumer preferences away from high-fat options, such as TXRH’s huge, savorous, juicy steaks. Another concern is rising food costs. Last year, food costs grew 6.8 percent, reducing net profit margins to 5 percent even though menu prices were increased. This year, TXRH may not be able to raise prices enough to offset the increases in meat, vegetable and bakery costs. But Taylor runs an efficient, lean business model, and units are open only during the dinner shift on weekdays (lunches are only on weekends), limiting down-time costs during the day. Meanwhile, the staff is always fresh and Johnny on the spot for dinner. TXRH has a strong balance sheet and only five members on its board of directors, who authorized a $90 million share buyback in the past two years.
Management has targeted 40 new units for 2014, which may be reduced by half as commodity prices continue to rise and consumer spending slows. I like the company. I like the menu selections, and I can’t recall a less than enjoyable experience among the dozens of times I’ve dined at a Texas Roadhouse restaurant. I admire Taylor’s management skills, and his successes during the past decade are impressive. However, I feel that TXRH shares, trading at 25 times earnings, are a bit too high for most tastes. Darden Restaurants, Ruby Tuesday, Cracker Barrel, McDonald’s, Brinker International and other food chains trade between 12 and 17 times earnings. And the consensus of 15 analysts who follow TXRH is that a $27 price target is as high as the stock should go for the next year to come.