The Best Small Cap for 2007: Texas Roadhouse

Where have all the cowboys gone? Forget that. Where have all the publicly traded casual steakhouses gone? This year alone, we have seen CBRL Group (Nasdaq: CBRL  ) agree to sell its Logan's Roadhouse chain, just as Lone Star Steakhouse (Nasdaq: STAR  ) and Outback Steakhouse parent OSI Restaurant Partners (NYSE: OSI  ) have agreed to buyouts.

Upscale chophouses, including Morton's (NYSE: MRT  ) and Ruth's Chris (Nasdaq: RUTH  ) , have gone public to help fill the void, but they serve entirely different demographics. The high-end joints cater to ritzy dates and folks looking to seal business deals. By and large, the masses flock to attractively priced casual eateries such as Texas Roadhouse (Nasdaq: TXRH  ) .

The recent details suggest that it's not just hungry patrons the chains are attracting. Private equity firms are diving in, steak knife first. Naturally, they wouldn't be buying if they didn't think the sector will appreciate considerably. These folks do their homework. They leave no stone unturned, no leftover uneaten.

Here's the beef
Texas Roadhouse is trading at 33 times this year's earnings and 27 times forward profitability. That may not sound cheap, but keep in mind that Texas Roadhouse is still early in its expansion cycle. The company has just a quarter of the locations the 938-unit Outback Steakhouse concept has. For those scoring at home, the slower-growing Outback was scooped up at 25 times this year's earnings. The troubled Lone Star chain comes in at 32 times this year's bottom line.

Things are a bit rosier over at Texas Roadhouse. Sales are up 31% through the first three quarters of the year. The gains are mostly part of the buildout process, though strength at the store level has also played a major part in the Texas Roadhouse success story. Comps are up 3.4% so far in 2006, and that's stacked on top of a 6% spurt over the same nine months a year ago.

That kind of resiliency stands out in the casual-steakhouse space. Outback Steakhouse, Lone Star Steakhouse, and Longhorn parent RARE Hospitality (Nasdaq: RARE  ) are all expected to post lower earnings this year than they did in 2005.

A tip of the CAPS
From the first time I stepped into a Texas Roadhouse in Gainesville, Fla., I was smitten. It just blew away my dining experiences at other roadhouse-themed steakhouses, including Lone Star, Longhorn, and Roadhouse Grill. I'm not alone in cheering Texas Roadhouse on, either. All 57 of us who have entered an opinion on the stock at Motley Fool CAPS believe that it will outperform the market. Yes, that's right. It's unanimous -- for now. The universally bullish comments tend to hinge on the great dining experiences, but some of my fellow Fools are quick to point out the heady expansion rate and the way the company is snapping up franchised locations, in a move that will be accretive to earnings.

Maybe the growth won't be as explosive as it will be with some of the more high-octane names in this tournament, but the groundwork is in place for an already popular concept to conquer even more real estate and deliver market-thumping returns along the way.

You can't ask for much more than that. OK, so maybe you can ask for some of the chain's award-winning ribs or hand-cut steaks. How about some of those delicious, complimentary warm rolls while you wait?

Even your portfolio is getting hungry, so why not feed it some Texas Roadhouse? I think that it will be the best small-cap investment of the year ahead . but only time will tell. If you agree with me, just head on out to the Motley Fool CAPS community intelligence database and rate Texas Roadhouse "outperform." If you want to be the first to disagree, come on over and rate it "underperform." Based on your thoughts, we'll declare the best small cap for 2007 early next week.

Cowboy up, and get to know one of the few remaining standalone casual-steakhouse chains still standing.

Seen our other contenders for best small cap? If not, click here.

OSI Restaurant Partners is anInside Valuepick.

Longtime Fool contributor Rick Munarriz has been to several casual steakhouses and regrets that the nearest Texas Roadhouse to his home is a three-hour drive away. He does own shares in CBRL Group.Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Fool has a disclosure policy.

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