Running a steakhouse chain isn't easy these days. Just look at Texas Roadhouse
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
Sure, some casual steakhouses like Outback, Rare Hospitality
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.
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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.