I’ve been keeping tabs on Texas Roadhouse Inc (NASDAQ:TXRH) for a little while, and though I like the concept, I’m beginning to get worried. The company has several positive factors working in its favor, with a growing dividend, and growing earnings. However, based on the company’s recent earnings, I would make the argument that there are at least four reasons they may miss estimates sometime soon.
Cooking up value
I continue to be somewhat shocked at the slow reaction time the market has to great restaurant concepts. I take a page from Peter Lynch’s book and follow quite a few restaurants, because as he said they are so easy to understand. Lynch said, once the company proves its concept, it moves into a fast growth phase where it duplicates this concept as it moves across the country.
What’s amazing is, even after years of positive earnings growth, investors can still find value in this industry. My favorite example is Brinker International, Inc. (NYSE:EAT), which pays a competitive yield, and is still growing fast. Investors also have a chance to pick up shares of restaurants that are turning around, like Darden Restaurants, Inc. (NYSE:DRI). Darden’s Olive Garden chain has been a consistent performer, but the Red Lobster concept has been holding the company back. A more competitive Red Lobster would give investors a reason to expect better results.
For investors looking for better growth, a younger concept like Buffalo Wild Wings (NASDAQ:BWLD) might make sense. The company has been posting impressive revenue growth, and if they can keep input costs for chicken under control, this could be a great long-term investment.
Inflation in two places you don’t want
One issue facing Texas Roadhouse Inc (NASDAQ:TXRH) is the company has to deal with input cost inflation. The company’s heavy reliance on beef prices means their margins can compress suddenly. The company said for 2013 they expect 6% to 7% food cost inflation. While this wouldn’t be a huge deal for a company that will consistently raise prices, Texas Roadhouse has historically been very reluctant to do so. This would seem to argue for margin and revenue challenges going forward.
The other inflation Texas Roadhouse Inc (NASDAQ:TXRH) faces is completely self-inflicted, and that is the inflation in the company’s share count. When I read a company repurchased 1.78 million shares I’m usually pretty happy. However, even with this share buyback, total diluted shares were up 1.48% year-over-year. For a company that is growing very fast, a 1.48% increase in the share count might not be a huge deal. However, Texas Roadhouse Inc (NASDAQ:TXRH) has two additional challenges that just make these additional shares like rubbing salt in the wound.
Less Than Expected
Texas Roadhouse Inc (NASDAQ:TXRH)investors can’t afford to ignore the challenge to the company’s margins. The company’s operating margin in the last quarter was 7.13%. By comparison, the only competitor we’ve mentioned with a lower margin is Darden at 3.88%. Considering that Darden is struggling to turn their Red Lobster concept around, it makes sense the company is struggling.
Relative to Texas Roadhouse’s two fast growing competitors, Brinker and Buffalo Wild Wings (NASDAQ:BWLD), the company’s lower margin spells trouble. Buffalo Wild Wings (NASDAQ:BWLD) operating margin is 7.7%, and Brinker managed a margin of 8.93%. With each of these companies expected to grow faster than Texas Roadhouse, investors might be tempted to switch.
If Texas Roadhouse’s lower margin was accompanied by strong revenue growth, bottom line EPS growth might not be an issue. However, I’m beginning to question what type of top line growth the company can realize.
For full year 2013, analysts expect Texas Roadhouse to grow revenue by 10.4%. The company said it expects to open about 28 new restaurants during the year, on top of the 392 already in operation. This means new store growth should contribute about 7.14% to revenue growth. The troubling thing is the company only said they expect “positive comps.” To meet analysts’ estimates for revenue growth, the company will have to achieve at least 3.26% growth from either more guests, or through price increases.
Better Opportunities
It seems like there are better opportunities for investors at the current time. Texas Roadhouse’s shares sell for over 18 times projected earnings, and it seems clear that the company may run into challenges to meet the 13.67% EPS growth analysts expect.
It’s tough to recommend Darden, even with its 3.88% yield, but Buffalo Wild Wings (NASDAQ:BWLD) and Brinker are a different story. Buffalo Wild Wings has better margins than Texas Roadhouse, and while the company doesn’t pay a dividend, they are expected to grow much faster at 19.11%.
Brinker beats Texas Roadhouse by nearly every measure. The company pays a higher yield at 2.12% versus 1.85%. Analysts expect slightly better growth at 13.84% versus 13.67%. Additionally, while Texas Roadhouse’s share count is growing, Brinker has been busy shrinking its shares. In the end, investors who like restaurant stocks should probably consider trading some Texas sized challenges for a red hot Chili’s.
The article 4 Numbers Say This Company Could Miss Estimates This Year originally appeared on Fool.com and is written by Chad Henage.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
