Overall, the casual dining industry appears to be stagnating, overshadowed by the rise of fast-casual chains.
However, Texas Roadhouse is delivering solid growth, outpacing its peers.
At the same time, it is trading at a discount to the broader restaurant industry.
The casual dining space is generally not known as a high growth industry. In recent years, it's been overshadowed by the rise of fast casual chains such as Chipotle Mexican Grill, which have managed to grow earnings and revenue at a staggering pace. However, there are still a few solid growth companies left in the casual dining space, which are often overlooked. One of these is Texas Roadhouse (NASDAQ:TXRH). Not only is it growing quickly, but it is trading at a discount to the overall restaurant industry.
Company at a glance
For those who aren't familiar with the stock, Texas Roadhouse is a chain of Western themed restaurants that operates and franchises restaurants under the same name. Steaks are its main specialty. The company has a market cap of $1.86 billion and some 46,000 employees, with around 425 restaurants. Based in Kentucky, the company has been around since 1993.
Over the last few years, Texas Roadhouse has managed to deliver consistent earnings growth, annual EPS more doubling from $0.52 in 2008 to $1.08 in fiscal 2013. Due to a string of earnings misses, the stock has underperformed the S&P over the last twelve months, but there are once again signs of strength.
Its latest earnings report again showed double-digit growth on the top as well as the bottom line. Second-quarter diluted EPS increased by nearly 17% year-over-year on a 12% rise in revenue, partly as a result of a $2.4 million decline in operating costs following the company's annual managing partner conference.
Meanwhile, comp store sales rose by 2.9% at company-owned locations and 3.5% at franchised restaurants. For the first four weeks of the third quarter, comp store sales increased by a healthy 4%. Looking ahead, the company is planning on opening a number of new restaurants in order to take advantage of the brands' solid growth.
To put these numbers in perspective, let's take a look at the results from another player in the casual dining industry, Darden Restaurants (NYSE:DRI), owner of brands such as LongHorn Steakhouse and Olive Garden. After topping out in 2012 at $3.58, annual EPS dipped to $3.13 in 2013 and $2.34 in 2012 for a 65% decline over two years. For fiscal 2014, EPS was down to $2.15.
The company has been struggling with traffic declines at its major brands, and the sale of its flagship Red Lobster brand has been met with skepticism by many investors. Q4 earnings were down around 55% year-over-year, although revenue remained relatively stable.
For the quarter, LongHorn Steakhouse held up fairly well with comps up 2.4% for the period and 2.7% for the year. This offers some clues as to Texas Roadhouse's success; Americans might just like eating steak. The company is able to benefit from specializing in this growing dining category, which grants it greater efficiency and more effective execution.
Valuations and metrics
While slightly more expensive than its casual dining counterparts at 23.5 times trailing earnings, Texas Roadhouse is still trading at a discount to the overall restaurant industry average of 27.5 which includes the higher-valued fast casual space. Darden Restaurants trades at around 19 times trailing earnings, which seems pricey considering their performance.
Quarterly sales growth of 12% is also considerably higher than the 8% industry average, while the price-to-book is lower at 1.21. The stock has a decent return on equity of around 15%, and with a total debt to equity ratio of under 10 and some $77.5 million in cash, the company's balance sheet looks good. Based on these figures, the company looks undervalued.
The bottom line
In the midst of a largely stagnant casual dining industry, some companies are managing to perform considerably better than their peers. Texas Roadhouse, a chain of restaurants specialized in steak, has been posting impressive growth for the last few years, and for its latest report delivered double-digit earnings and revenue increases. Additionally, the stock is priced at a discount to the broader restaurant industry, and as such looks like a good bet going forward.