Does The Hype Around Texas Roadhouse, Inc.’s (NASDAQ:TXRH) Growth Justify Its May Share Price?

Texas Roadhouse, Inc. (NASDAQ:TXRH) closed yesterday at $54.66, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

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See our latest analysis for Texas Roadhouse

Has the TXRH train has slowed down?

Investors in Texas Roadhouse have been patiently waiting for the uptick in earnings. If you believe the analysts covering the stock then the following year will be very interesting. Expectations from 18 analysts are bullish with earnings per share estimated to surge from current levels of $2.153 to $2.838 over the next three years. On average, this leads to a growth rate of 11% each year, which illustrates an optimistic outlook in the near term.

Can TXRH’s share price be justified by its earnings growth?

As the legendary value investor Ben Graham once said, “Price is what you pay, value is what you get.” Texas Roadhouse is trading at price-to-earnings (PE) ratio of 25.39x, which tells us the stock is overvalued based on current earnings compared to the Hospitality industry average of 23.14x , and overvalued compared to the US market average ratio of 17.74x .

NasdaqGS:TXRH Price Estimation Relative to Market, May 21st 2019
NasdaqGS:TXRH Price Estimation Relative to Market, May 21st 2019

We understand TXRH seems to be overvalued based on its current earnings, compared to its industry peers. However, since Texas Roadhouse is a high-growth stock, we must also account for its earnings growth by using calculation called the PEG ratio. A PE ratio of 25.39x and expected year-on-year earnings growth of 11% give Texas Roadhouse a quite high PEG ratio of 2.39x. This tells us that when we include its growth in our analysis Texas Roadhouse’s stock can be considered overvalued , based on fundamental analysis.

What this means for you:

TXRH’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are TXRH’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has TXRH been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of TXRH’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.