International Expansion And Digital Kitchens Will Elevate Future Performance

Key Takeaways

• Strategic expansion and digital integration are expected to boost revenue growth, operational efficiency, and net margins.
  
• Capital-return initiatives indicate strong cash flow, positively impacting earnings per share and shareholder value.
  
• Rising labor and commodity costs, coupled with external disruptions, may pressure Texas Roadhouse's margins and earnings despite significant planned capital investments.

Catalysts

Operates casual dining restaurants in the United States and internationally.

• The company is focusing on expanding its footprint with plans for approximately 30 company restaurant openings across its three brands in 2025, alongside international expansion. This expansion is expected to drive future revenue growth.
  
• The integration of digital kitchens across all locations by the end of 2025 is aimed at improving operational efficiency, which could lead to better net margins and enhanced productivity.
  
• Texas Roadhouse is implementing a 1.4% menu price increase in the second quarter of 2025 without affecting its value proposition, which could positively impact revenue and help offset inflationary pressures.
  
• The acquisition of 13 franchise restaurants is expected to contribute to revenue growth and improve earnings through increased operational control and synergies.
  
• An 11% increase in the quarterly dividend and a new $500 million share repurchase program reflect strong cash flow generation and a commitment to returning capital to shareholders, potentially boosting earnings per share (EPS).

Texas Roadhouse Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Texas Roadhouse's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 8.2% in 3 years time.
• Analysts expect earnings to reach $567.0 million (and earnings per share of $8.59) by about April 2028, up from $433.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.2x on those 2028 earnings, up from 23.5x today. This future PE is greater than the current PE for the US Hospitality industry at 21.8x.
• Analysts expect the number of shares outstanding to decline by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Texas Roadhouse Future Earnings Per Share Growth

Risks

• Increased wage and other labor inflation, driven by state-mandated wage increases and higher benefits expense, could compress net margins as labor costs rise.
  
• Commodity inflation is expected to be 3% to 4%, primarily due to a tighter cattle supply, which may lead to higher food costs and pressure overall earnings.
  
• Planned capital expenditures of approximately $400 million for restaurant relocations and new openings may result in higher capital outlays, potentially affecting net income if these investments don't yield expected returns.
  
• Discrepancies caused by calendar shifts, such as the 53rd week impacting sales growth comparisons, could create challenges in consistently measuring and reporting comparable sales growth, thus impacting revenue perceptions.
  
• Further challenges with external factors like weather disruptions and calendar shifts are negatively impacting traffic and same-store sales, which could reduce revenue and earnings if they continue to persist.

Valuation

• The analysts have a consensus price target of $189.866 for Texas Roadhouse based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $232.0, and the most bearish reporting a price target of just $139.78.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.9 billion, earnings will come to $567.0 million, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of $153.22, the analyst price target of $189.87 is 19.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.