Texas Roadhouse's Upside Potential Is 'Limited,' JPMorgan Says In Downgrade

At first glance, Texas Roadhouse Inc TXRH reported another strong quarter Monday. But digging beyond the headline numbers shows the company now faces "limited" upside potential, according to JPMorgan.

The Analyst

JPMorgan's John Ivankoe downgraded Texas Roadhouse from Neutral to Underweight and lifted the price target from $54 to $63.

The Thesis

Texas Roadhouse signaled in its first-quarter report and conference call that it plans on investing significantly in the customer experience, as evidenced by an "unheard of shift" from three table wait stations to two, Ivankoe said in a downgrade note. 

The restaurant chain could see a 7-percent increase in labor dollars per operating week in fiscal 2018 and another 5 percent in the following year — essentially negating what would otherwise be strong labor leverage, the analyst said. 

The company's Bubba's concept is showing signs of success, and the analyst's calculations pegs its comps at 4.9 percent in the first quarter versus 2.4 percent in the prior quarter and 0.9 percent in the third quarter of 2017, Ivankoe said. It is "nearly impossible, or at least very unlikely" for any restaurant chain to achieve the same level of success in a second concept as it has achieved in the first, he said. 

Many investors are attracted to Texas Roadhouse's stock amid expectations for continued beat-and-raise quarters, Ivankoe said. Even assuming near cycle-peak store margins, the stock's multiple is "full" and at best will see "little sustained upside from here," the analyst said. 

Price Action

Texas Roadhouse shares were lower by 2.2 percent at $62.12 at Wednesday's close. 

Related Links:

Texas Roadhouse Is A 'Model Of Consistency,' Analyst Says

Wedbush On Texas Roadhouse: This Type Of Growth Shouldn't Be Possible

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