Running a steakhouse chain isn't easy these days. Just look at Texas Roadhouse (NASDAQ:TXRH), which had a disappointing quarter despite a healthy 6.5% gain in comps and a 29% spike overall in fourth-quarter sales. Higher food costs and the recent retail epidemic of lease adjustments caused the company's operating profits to actually dip during the December quarter.
Although the company still nailed Wall Street's charge-adjusted targets and has no problem guiding investors to expect earnings per share of $0.85 to $0.86 for 2005, you have to step back and question whether Texas Roadhouse's valuation is as big as the state it's named after.
Net margins fell in 2004, and the company isn't exactly looking to reverse that trend. It's projecting its 23% gain in sales for 2005 to be accompanied by a 20% to 21% spurt in EPS.
With the stock closing at $28 yesterday, one has to wonder whether the company is really worth nearly 40 times trailing earnings and 33 times this year's projected profitability.
Investors can always look back a dozen years to a time when Outback Steakhouse (NYSE:OSI) and Lone Star Steakhouse (NASDAQ:STAR) commanded wild premiums. Yet Lone Star's stock went on to peak nine long years ago, and in terms of concept, it's a pretty fair match with Texas Roadhouse. Other close matches would include Roadhouse Grill (OTC BB: GRLL), now wilting away as a penny stock, and two companies that were trading publicly until they were acquired without much fanfare in the late 1990s: Sagebrush and Timber Lodge Steakhouse.
Sure, some casual steakhouses like Outback, Rare Hospitality (NASDAQ:RARE), and CBRL Group's (NASDAQ:CBRL) Logan's Roadhouse have turned out as decent investments in recent years. But that may only serve as fair warning to investors that the market is nearing saturation.
In fact, Texas Roadhouse already has nearly 200 locations open, and it's looking to tack on just 26 new eateries this year. The company is also looking to buy back some of its franchisees. Although that isn't an admission that the company fears growing its numbers by opening new units, a cynic may see it as a convenient masking agent.
It was easy to get excited when the company went public in October. Restaurant stocks early in their growth cycle can be great investing plays if the concepts prove to be popular and profitable. Yet Texas Roadhouse is much further along in its life cycle than are other upstarts that choose to go public.
Given fickle dining tastes and the company's need to improve its margins to 2003 levels, the stock is trading at too rich a premium these days. Still, Texas Roadhouse is a quality company. I've managed only a pair of dinner stops at its Gainesville location in Florida, but I walked away impressed -- and full -- both times. So I'll keep watching the stock. It would be an awfully tempting nibbling opportunity if the stock somehow managed to fall into the high teens. Until then, I think I'll have to pass. I'm still full.
Need some more options on your reading menu?
- Learn more about the leasehold improvement accounting adjustments.
- Find out what happened when Texas Roadhouse went public last year.
- Check out some real Rule Breakers at a much earlier stage in their defiance.
Longtime Fool contributor Rick Munarriz does enjoy the casual steakhouses. In fact, he was at one of the troubled Roadhouse Grills on Sunday. He owns shares in CBRL Group. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
