Texas Roadhouse Stock Steering for New Highs This Year

Key Points

• Texas Roadhouse's Q3 results were lackluster but only compared to the analyst's consensus estimates. Growth is solid, and margins are widening. 
• The capital return is reliable and expected to grow by double-digits in 2025. 
• Analysts are lifting targets, leading to the high-end range of 20% to 30% within the next 12 months. 

Texas Roadhouse NASDAQ: TXRH is a highly valued stock, but it is valued that way because it is the leading restaurant player and has ample growth potential to drive long-term shareholder value increases. The initial reaction to the Q3 results was tepid, but it was nothing more than a meh reaction to solid results and not an indication that the market was topping. 

A pullback in share prices would be a blessing for investors, providing an entry into a high-quality growth company able to sustain a rock-solid balance sheet while paying substantial dividends. However, whether there is a pullback in price action or not, Texas Roadhouse shares can hit a new high this year because the results support the trend, and the indications for share price increases are robust. 

Texas Roadhouse Serves Industry-Leading Growth and Wider Margin

Texas Roadhouse's Q3 results were lackluster but only compared to the high bar set by analysts. Analysts have been lifting their estimates for the last year, with recent revisions leading to the high-end range. Regardless, the company’s as-expected 13.4% revenue growth is industry-leading, driven by increased comps and new stores. Comps are up by 8.5% at company-owned stores and 7.2% at franchisee locations, and togo is up by 12.6% and continues to aid margin. The company has another ten new stores in development and plans to acquire 13 domestic franchisee locations, a move expected to help top and bottom-line results. 

Margin news is good, with check volume and productivity offsetting labor costs and inflation to drive leveraged results on the bottom line. Restaurant-level margin dollars increased by 24.1% on a 140-basis-point increase in restaurant margin. Income from ops grew by 38%, net income by 32.3%, and GAAP earnings by 32.5%, aided by share repurchases. The GAAP EPS missed the consensus by 500 basis points, which could be better news. Still, it is growing, margin improvement is expected to stick, and it remains sufficient to sustain company health, the growth outlook, and capital returns. 

Share repurchases aren’t robust but sufficient to offset share-based quarterly compensation. The average count is down by 0.1%, sustaining an even count compared to the prior year, and is expected to continue falling at or near this pace for the foreseeable future. The dividend is more substantial, running at 42% of earnings and rising at a double-digit pace. The pace of increases has slowed since the distribution was reinstated but remains high at 10%. The dividend was cut during the pandemic to preserve capital, a move paying off for investors today. The pace of increases helps sustain the uptrend in share prices and is likely to be sustained at or near 10% in calendar 2025

Guidance and Analysts Lead Texas Roadhouse Higher 

The company’s guidance is sound. The first few weeks of the quarter indicate that comp-store growth is steady at nearly 8.5%, setting the company up for a strong holiday season. 2025 is also expected to be good, with positive comps and net new store count growth to drive business. The guidance includes a forecast for an 11% increase in CAPEX, aligning with the outlook for a double-digit dividend increase next year. Regarding the balance sheet, assets were up at the end of the quarter, with total liability running near 1.25x equity and .55x assets. Equity, the measure of shareholders' value, was up by nearly 15% and is expected to continue increasing.

The analysts’ response to the news is good. The first revisions tracked by MarketBeat.com included positive revisions to price targets, maintaining the Moderate Buy rating, and incrementally lifting the consensus price target, extending the trend in place. The critical detail is that the rising consensus figure supports the market, and revisions lead to the high-end range, a gain of 20% to 30%, well above the price action leading into the report.