Texas Roadhouse Poised To Fall?

by Trefis Team
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After more than a 23% rise this year, at the current price near $70 per share, we believe Texas Roadhouse’s stock (NASDAQ: TXRH) is poised to fall. TXRH stock has increased from $56 to $70 since the start of the year compared to the S&P 500 which increased 1.2% in 2020. The stock has outperformed the market and was at a 52 week high in mid-October. This is despite the fact that the revenues have fallen 18% to a consolidated figure of $1,129 Mil for the last 2 quarters ($653 Mil in 2020Q1 + $476 Mil in 2020Q2) from the consolidated figure of $1,380 Mil a year ago ($691 Mil in 2019Q1 + $690 Mil in 2019Q2).

The company has seen growth in revenue over recent years, while its P/E multiple has marginally increased. We believe the stock is likely to fall in the near term. Our dashboard Buy Or Sell Texas Roadhouse Stock? provides the key numbers behind our thinking.

The 37% rise in TXRH stock price between 2017 to 2019 is justified by significant growth in earnings during those two years. Texas Roadhouse’s revenue increased 24% from $2.2 billion in 2017 to $2.8 billion in 2020. This effect was amplified by margins increasing from 6.2% to 6.6% during this period. On a per share basis, earnings went up from $1.85 to $2.47. Higher revenue and margins were driven by an overall increase in restaurants and better operational practices.

During the same period, the P/E multiple declined from 29x to 23x. This was because the rise in stock price was lower than the growth in EPS. The P/E jumped in 2020 following the Fed’s multi-billion dollar stimulus package announced which lifted market sentiments. Currently the multiple stands at 29x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Texas Roadhouse’s revenues have taken a hit as most restaurants are closed and some are on a takeout-only mode due to many regions on lockdown. This was evident in the Q1 and Q2 results where the revenue fell 18% for the first half of 2020 while earnings were recorded at $-0.25 compared to $1.33 in the first half of the previous year .

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.


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