A second positive for the company was their performance generating free cash flow. It’s one thing to generate operating cash flow growth, but if the company has to spend a lot on capital expenditures, they may not produce free cash flow. Since Buffalo Wild Wings (NASDAQ:BWLD) doesn’t pay a dividend, investors might assume their 24.32% increase in core operating cash flow is a good sign. However, the company spent so much on capital expenditures, that over $300 million in sales only generated about $700,000 in free cash flow. By comparison, Texas Roadhouse generated almost $23 million in core free cash flow and paid about $13 million in dividends.
This performance means Texas Roadhouse Inc (NASDAQ:TXRH)’s “core payout ratio” was about 55% in the current quarter. While Brinker International, Inc. (NYSE:EAT) did better on this measure with a 36% core payout ratio, Darden Restaurants, Inc. (NYSE:DRI) did much worse, reporting a payout ratio well over 300%. Strong operating cash flow growth, combined with a reasonable payout ratio, suggests Texas Roadhouse can continue growing their dividends and buying back shares.
The third reason to expect good things from Texas Roadhouse has to do with the fact that analysts seem to still be playing catch up. At this point, analysts are calling for 13.67% growth in EPS from the company over the next few years. From what I can figure, this number is too low. Considering the company is planning on about 7% growth in new restaurants, and that same-store sales have been very strong, I wouldn’t be surprised to see revenue growth of at least 11% to 12%. In fact, this is right in line with analysts expectations of 12.5% revenue growth for 2013.
However, in the current quarter 11% revenue growth equated to almost 20% EPS growth. Only Buffalo Wild Wings (NASDAQ:BWLD) is expected to see stronger revenue growth of 21.5%, but that company struggles with chicken prices, and strong revenue growth sometimes produces negative earnings. Of their more established competition, Brinker International, Inc. (NYSE:EAT) is expected to see EPS grow by 14% on a single-digit increase in revenue. Darden Restaurants, Inc. (NYSE:DRI) is having real problems with same-store sales, and is expected to see just a 5.4% increase in earnings. In short, I expect that Texas Roadhouse’s 11% or 12% revenue growth will produce much more than 13.67% EPS growth, I think something in the 15% to 20% range is a reasonable expectation.
Texas Roadhouse seems to offer investors strong same-store sales, good cash flow growth, and good earnings growth. Considering that Texas Roadhouse has beaten earnings estimates in each of the last four quarters by an average of 9.48%, I think analysts are underestimating this company. The stock looks a bit expensive at about 20 times forward earnings. However, if you add the company’s 2.1% yield to a 13.67% growth rate that could be too low, the shares may not be as expensive as they first appear. Some companies are all sizzle and no steak. With Texas Roadhouse, you get the sizzle and the steak too!
The article The Analysts Are Still Underestimating This Stock originally appeared on Fool.com is written by Chad Henage.
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