With over 300 company owned restaurants, as well as franchise restaurants, Texas Roadhouse's (NASDAQ:TXRH) sales could hit my estimate of $1.2 Billion in 2013. Expenses and profit margins at this mature restaurant chain have been relatively stable on a percentage of sales basis, in my opinion, and operating cash flow less capital spending should meet my net cash flow projection of $50 million in 2013. I believe that annual increases in the number of restaurants of about nine percent plus same store sales growth of about four percent should be the basis for my growth estimate for net cash flows of about 13.2% for the next five years.
This stock is currently valued in the market at a trailing price/earnings ratio of about 17X. There are a number of other major restaurant chains with price/earnings ratios in the 15-16X range, including McDonalds (NYSE:MCD), although Starbucks (NASDAQ:SBUX) has a P/E ratio of about 28X.
Yahoo Finance assigns a beta of 0.75 to Texas Roadhouse shares, and I think this would be valid for short-term observations in terms of weeks or months. However, when I look back over the last seven years or so, Texas Roadhouse stock price would be up about 42% versus an increase of about 22% for the Standard and Poor's 500 Index, if my eyeball of the stock chart serves me correctly. I'm guessing that the long-term beta of this stock ought to be closer to 1.90, which would be necessary data to support my use of the Capital Asset Pricing Model in finding a target price for these shares.
Assuming net cash flow of $50 million, an eight percent risk premium for the market, a two percent risk-free rate, a 13.2% growth rate for Texas Roadhouse, a beta of 1.90 and $125 million in long-term debt, I have attempted to make the following valuation rough estimates:
Cost of Equity Capital = 2.0% + (8.0% * 1.9) = 17.2%
value of equity = [$50 million/(17.2%-13.2%)] - $125 million =
$1,125 million, on about 71 million shares, or a wild guess of a price target of about $15.85 per share.
As I look over the Income Statement, I notice that major expenses tend to come in as the same percentages of sales from year to year. This would tend to indicate that the company is run on a cost-efficient basis; so, I don't see where expenses could be cut.
These shares pay a dividend just above two percent, and I believe this stock should perform at least as well as the market. It does bear mentioning that the company has a share repurchase program, and possible share repurchases could be considered to be or have the effect of an additional hidden dividend, in my opinion.
Finally, the Country Western Texas theme of these medium to bargain priced restaurants has proven to be a successful formula. The atmosphere and quality of the food and service are excellent.
While Texas Roadhouse has a relatively strong balance sheet in terms of assets versus liabilities, and while its income statement shows that the company has consistently maintained its profit margins, its stock looks to be fairly valued in the market. I do believe that Texas Roadhouse has the potential to out distance the market in a significant way over the next five years, due to its relatively high long-term beta, if I have correctly guessed its beta. However, this stock could be still vulnerable to take a potential dip, as it has in the past, in the event of a major market downturn. In other words, I do not believe that Texas Roadhouse shares should be considered a defensive flight to safety, but instead regard this company as being at least an average risk in the overall economy.