Texas Roadhouse's Valuation, In-Line Growth Prospects Prompt Wedbush Downgrade

Restaurant chain Texas Roadhouse Inc TXRH has seen its stock rise nearly 20 percent since the end of July, and the higher valuation implies there's little room for error moving forward, according to Wedbush.

The Analyst

Wedbush's Nick Setyan downgraded Texas Roadhouse from Outperform to Neutral with an unchanged $67 price target.

The Thesis

Texas Roadhouse's stock momentum can be attributed to encouraging industrywide data, but Wedbush's firsthand checks point to mostly in-line growth prospects, Setyan said in the downgrade note. (See the analyst's track record here.)

Same-store sales trends since the start of the third quarter are likely up 4.3 percent, which is in-line with consensus estimates, the analyst said. The firm's checks also suggest a 3.8-percent (co-owned) same-store sales growth rate in 2019 and 3.7-percent systemwide, which is slightly above consensus estimates of 3.5 percent and 3.4 percent, respectively.

In addition to expectations for in-line performance, Texas Roadhouse faces food inflation risks, Setyan said. It is likely that 2019 will see lower beef production, and commodity inflation could come in higher in 2019 than 2018, he said.

This puts the Street's expectations of 20 basis points of COGS (cost of goods sold) leverage at risk next year, along with the Street's model of labor expenses of 32.7 percent, Setyan said.

Texas Roadhouse does boast industry-leading transaction growth and unit growth, which warrants a premium valuation versus the entire casual dining sector, according to Wedbush. The firm's $67 price target is based on a 20 times P/2019E multiple, which is a 30-percent premium versus its peers.