On Wednesday, Texas Roadhouse (NASDAQ:TXRH) received an upgrade to Outperform from a previous Neutral rating by Baird analysts, accompanied by an increase in price target to $175 from $160. This optimistic revision is based on the company's potential for continued strong performance and improved profitability in the upcoming year.
Baird highlighted Texas Roadhouse's impressive same-store traffic, which has outperformed industry benchmarks. In the second half of 2023, the company's traffic grew by 4.6%, compared to the industry's average decline of 2.5%. This robust traffic is anticipated to be a key driver of profitability for the company's operated restaurants in 2024. The factors contributing to this positive trend include excellent unit-level execution and a strong value proposition, which are expected to maintain momentum into 2024. This could lead to earnings per share (EPS) that surpass current estimates, with projections of a 21% increase to $5.50, against a consensus of $5.63.
The firm also forecasts the potential for significant growth over the next several years for Texas Roadhouse. With an anticipated annual unit growth of over 5% and healthy comparable sales, the company could see annual revenue increases of 10% or more. This growth, coupled with the company's aim to return restaurant-level margins to a long-term target of 17-18% from 15.4% in 2023, suggests a high-teens EPS compound annual growth rate (CAGR) over the next five years.
Despite a current near-term P/E ratio of 26.6 times, which is at the higher end of Texas Roadhouse's historical range, the valuation is considered reasonable by Baird when compared to the broader market. The premium over the S&P 500's multiple is 28%, slightly below the 10-year average of 31%. The firm believes investors will maintain a substantial premium on the stock, given the company's bright growth prospects and its approach to larger-cap territory.
The new price target of $175 incorporates a forward P/E multiple of approximately 27 times, which is a 31% premium to the current S&P 500 multiple. However, analysts also cautioned of the potential risks to their optimistic stance, including a possible downturn in consumer spending or prolonged beef inflation, which could constrain earnings growth and affect the stock's valuation.