We came across a bullish thesis on Texas Roadhouse, Inc. (TXRH) on Substack by Summit Stocks. In this article, we will summarize the bulls’ thesis on TXRH. Texas Roadhouse, Inc. (TXRH)’s share was trading at $172.05 as of Feb 24th. TXRH’s trailing and forward P/E were 26.59 and 24.45 respectively according to Yahoo Finance.
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Texas Roadhouse has established itself as a dominant force in the casual dining sector, leveraging a combination of quality, value, and culture to differentiate itself in a competitive market. With over 780 locations and continued expansion, the company has built a loyal customer base through its signature hand-cut steaks, fresh-baked bread, and vibrant dining experience. Founded in 1993 by Kent Taylor, Texas Roadhouse overcame early challenges, including funding rejections and site selection missteps, before gaining traction and going public in 2004. In addition to its flagship brand, the company operates Bubba’s 33 and Jaggers, expanding its presence across different dining formats.
A key driver of Texas Roadhouse’s success is its unique operational model, which aligns restaurant managers’ incentives with profitability. Each manager invests $25,000 and earns 10% of their store’s profits, ensuring strong execution and customer satisfaction. The company’s ability to offer generous portions at affordable prices, while maintaining profitability, is a testament to its cost efficiencies, such as avoiding national advertising and optimizing supply chain management. The lively atmosphere, complete with country music and enthusiastic staff, reinforces customer loyalty and drives repeat visits. While the company does not have an impenetrable moat, this combination of factors creates a formidable competitive edge.
Financially, Texas Roadhouse has consistently delivered strong same-store sales growth and disciplined expansion. Its decentralized management structure enables localized decision-making, improving efficiency and enhancing customer experiences. Despite inflationary pressures, the company has demonstrated pricing power, passing cost increases onto customers without sacrificing traffic. While the restaurant industry is notoriously competitive, Texas Roadhouse has sustained high customer retention through superior service and a differentiated dining environment.
There are risks to consider, including rising labor costs, fluctuating commodity prices, and potential economic downturns that could impact discretionary spending. However, the company’s strong free cash flow generation and prudent capital allocation mitigate these concerns. Management has reinvested excess cash into expanding company-owned stores, acquiring successful franchises, repurchasing shares, and paying dividends. This disciplined approach, combined with a consistent focus on customer experience, has positioned Texas Roadhouse as a long-term winner in the restaurant sector.
Leadership continuity has also played a critical role in Texas Roadhouse’s sustained success. Current CEO Jerry Morgan, who has been with the company since 1997, has upheld the legacy of founder Kent Taylor, maintaining a strong focus on culture and operational excellence. The executive team’s average tenure of 17 years underscores deep experience within the organization, reinforcing strategic consistency as the company scales.
The investment case for Texas Roadhouse revolves around two primary drivers: unit expansion and comparable restaurant sales growth. In a bullish scenario, assuming 6% annual unit growth and comparable sales growth beginning at 8% before stabilizing at 5%, the stock offers a 15% annual return. A more conservative case, with 5% unit growth and comparable sales starting at 6%, results in an 11% return. Even in a bearish scenario, with significant slowing in restaurant growth and comparable sales declining to 2%, the stock still generates a 9% return, highlighting its resilience.
While Texas Roadhouse does not possess the wide moat of companies like Visa or Mastercard, it has built a compelling brand, strong execution, and a differentiated customer experience. With a stock price of around $170-175, the risk/reward profile remains attractive, supported by steady cash flows and substantial growth potential. Given its disciplined expansion strategy, resilient business model, and customer loyalty, Texas Roadhouse offers a compelling long-term investment opportunity.
Texas Roadhouse, Inc. (TXRH) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 52 hedge fund portfolios held TXRH at the end of the third quarter which was 45 in the previous quarter. While we acknowledge the risk and potential of TXRH as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TXRH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.