Innovative Tech And Global Expansion Drive Robust Revenue And Margin Growth

Key Takeaways

• Strategic expansion and technology initiatives, such as Roadie First and digital kitchen conversions, are set to enhance operational efficiency and scalability.
  
• Strong cash generation coupled with disciplined menu pricing and cost management strategies indicate robust potential for margin expansion and sustained revenue growth.
  
• Growing commodity costs, new market uncertainties, and labor inefficiencies alongside escalated capital expenditures could strain Texas Roadhouse's financials and profitability.

Catalysts

Operates casual dining restaurants in the United States and internationally.

• Exceptionally high same-store sales growth and a robust pace of new store openings in 2024 indicate potential for sustained revenue growth.
  
• The introduction and execution of technology initiatives like the Roadie First technology system and digital kitchen conversion are expected to enhance operational efficiency and employee satisfaction, leading to improved net margins.
  
• Strategic expansion with a focus on both company-owned and franchised outlets, including international locations, suggests a scalable growth model that could significantly impact future earnings.
  
• Adjustments in commodity inflation guidance to approximately 2%, coupled with disciplined menu pricing strategies, reflect an ability to manage cost pressures effectively, supporting margin expansion.
  
• Strong cash generation and an increase in capital expenditure guidance for 2024 highlight a commitment to investing in growth and operational improvements, likely contributing to revenue expansion and shareholder value creation.

Assumptions

• Analysts are assuming Texas Roadhouse's revenue will grow by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.5% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $548.1 million (and earnings per share of $7.79) by about August 2027, up from $369.6 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 27.3x on those 2027 earnings, down from 30.4x today. This future PE is greater than the current PE for the US Hospitality industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Risks

• Increasing commodity costs, particularly with beef, could increase food and beverage expenses impacting gross margins if menu prices can't be adjusted accordingly to maintain margins.
  
• Investments in new store openings, technology initiatives, and capital projects coupled with the uncertainties of new market performance might strain financial resources impacting net earnings and cash flow.
  
• Labor efficiency improvements, while currently beneficial, could plateau or reverse, especially in markets with tight labor conditions, increasing labor costs that could squeeze operating margins.
  
• The escalating capital expenditure guidance for technological upgrades and store-level capital projects necessitates a delicate balance to ensure these investments achieve desired returns without adversely affecting cash reserves or diverting funds from other potentially value-creating opportunities.
  
• The reliance on continued strong same-store sales growth to drive revenue might be threatened by consumer spending behavior changes or increased competition, potentially affecting overall profitability and earnings sustainability.

Valuation

• The analysts have a consensus price target of $184.35 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 $209.0, and the most bearish reporting a price target of just $155.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.5 billion, earnings will come to $548.1 million, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $168.32, the analyst's price target of $184.35 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.