Longbow Turns Hungry For Texas Roadhouse's Stock

Shares of restaurant chain Texas Roadhouse Inc TXRH fell notably lower in reaction to its first-quarter print, and investors may want to consider taking advantage of the dip, according to Longbow Research. 

The Analyst

Alton Stump upgraded Texas Roadhouse from Neutral to Buy with a $65 price target.

The Thesis

Texas Roadhouse's decision to finally become more aggressive on menu price increases is one of three catalysts that turned Longbow bullish on the stock, Stump said in the Tuesday upgrade note. (See his track record here.) 

Texas Roadhouse's 1.5-percent menu increase in the second quarter — on top of the 1.7-percent increase in late 2018 — implies the first cumulative price increase of more than 3 percent since 2012, the analyst said.

This should help keep restaurant-level margins stable year-over-year for the next three quarters versus a 130-basis point decline from the first quarter of 2018 to the first quarter of 2019, Stump said. 

Texas Roadhouse also boasts what could be considered the most consistent comp growth profile within the entire restaurant universe, the analyst said. 

" ... Company-owned 2-year stacks accelerated to over 10% growth over the last three quarters for the first time since 2016 and are on pace to top 10% again in the current quarter based on TXRH’s reported comp growth of 2.9% through the first four weeks of 2Q19 against an 8.5% comparison during the same period last year." 

Texas Roadhouse's stock is trading at around 12 times 2019 estimated EV/EBITDA and just 10.5 times 2020 EV/EBITDA estimate, which is attractive given its outlook for a high-single to low double-digit revenue growth profile ahead, according to Longbow. 

Price Action

Texas Roadhouse shares were trading up 1.86 percent at $55.93 at the time of publication Tuesday. 

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