Texas Roadhouse's Upside Is Priced In, BTIG Says In Downgrade

BTIG Research downgraded Texas Roadhouse TXRH on the basis of both the restaurant chain's earnings and its valuation.

The Analysts

Analyst Peter Saleh downgraded Texas Roadhouse from Buy to Neutral.

The Thesis

Multiple expansion seems unlikely given Texas Roadhouse's heightened valuation, Saleh said in the downgrade note. (See his track record here.)

Continued mid-single digit labor inflation should likely offset strong sales, moderating the company's operating profit growth, the analyst said.

“Persistent labor inflation has been a challenge for Texas Roadhouse in recent years, leading to several earnings shortfalls in recent quarters despite incredibly strong sales trends. All signs indicate that wage inflation will continue at its current mid-single digit pace for the foreseeable future, driven by mandated wage increases, limited labor availability and planned wage/benefit increases,” Saleh said.

The company’s modest menu pricing should continue into 2019, the analyst said. This dynamic should continue to pressure restaurant margins going forward, he said.

“While there may be some upside to comp/traffic expectations given the solid industry trends of recent months, we believe that any potential upside is more than reflected in the current valuation.”