Texas Roadhouse: Undervalued As Menu Price Hikes Recover Margins

Texas Roadhouse Inc. signage is displayed outside of a restaurant in Arvada, Colorado, U.S., on Friday, March 11, 2011. Americans are back to eating out at full-service eateries like Cheesecake Factory Inc. and Texas Roadhouse Inc. restaurants, putting the industry on track for its first sales gain in more than three years as confidence in the recovery develops. Photographer: Matthew Staver/Bloomberg via Getty Images

Texas Roadhouse, Inc. (TXRH), a Russell 2000 component operates in the full-service restaurant industry with the brands Texas Roadhouse and Bubba’s 33. Even though the company has showcased strong top-line growth over the years, the stock has declined close to 9.7% year-to-date amid poor margins in 2018 compared to c. 15.8% gain of Russell 2000 Index.

The company blames higher labor cost for poor margins, which it expects to address through menu price hikes. In 2015, the company followed the same strategy when its margins narrowed due to rising commodity inflation. The margins improved in the following year. So did its forward PE ratio at the time. Similarly, as 2019 first quarter (2019 Q1) results indicate, TXRH’s margins are on a path to recovery at present. Therefore, the depressed forward PE ratio will also pick up over time, suggesting an opportunity to buy the undervalued stock. As opposed to ad-hoc price hikes, the long-term value of the stock, however, depends on the extent the company leverages its scale and brings in operational efficiency to decelerate its ever-rising cost base.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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