Texas-Sized Growth and Income

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The title of a recent article in Forbes caught my eye: Texas Roadhouse (NASDAQ: TXRH) Dividends and Gains More Than Peanuts”. For those who aren't aware, Texas Roadhouse is a relatively small chain of restaurants that specializes in steaks, burgers, and peanuts at every table. The Forbes article made the point that the company has fewer than 400 restaurants, so there are clearly years of expansion available to the company. In addition, the article mentioned that Texas Roadhouse has beaten earnings estimates each of the last four quarters by an average of about 11%. One thing that is unique about this company is, not only are they growing fast but they already pay a decent sized dividend.

In a casual dining industry, there's certainly no shortage of competition. Companies like Brinker International (NYSE: EAT), Buffalo Wild Wings (NASDAQ: BWLD), Darden Restaurants (NYSE: DRI), and Bloomin' Brands (NASDAQ: BLMN) all offer alternatives for diners. These competitors are all reasonable alternatives to Texas Roadhouse, but they don't offer the same type of growth and income at this company's size. In fact, among the competition we've mentioned, only Brinker International offers a similar combination of growth and income, and only Buffalo Wild Wings is slated to show faster growth. Let's take a look at Texas Roadhouse's most recent earnings report to get a sense of how well the company is performing.

In the last quarter, Texas Roadhouse reported a 15% increase in revenue, and diluted EPS jumped 28%. These gains were driven by strong comparable sales at both company-owned and franchised restaurants, which showed increases of 4.5% and 4.8%, respectively. The company opened seven new locations during the quarter and ended with a total of 380 restaurants. For many investors, hearing about a small restaurant chain that is growing revenue by double digits and increasing earnings might be enough to get their attention. However, Texas Roadhouse is making positive changes to their financials that make the company even more attractive.

Unlike some smaller restaurants that are spending tons of money just in expansion costs, Texas Roadhouse is committed to returning value to its shareholders. The company is continually repurchasing shares, which has contributed to the 1.65% drop in diluted shares in the last year.  In addition, the company is improving its balance sheet, with cash up $3 million and long-term debt down over $10 million.

What was particularly impressive was that the company's operating margin came in at 9.76%. Among its competition, only Darden Restaurants had a higher operating margin (11.03%) in its most recent quarter. By comparison, Brinker International showed a margin of 9.38%, Buffalo Wild Wings came in at 7.39%, and Bloomin' Brands showed an operating margin of just under 5%. While Texas Roadhouse is smaller than most of its competition, the company is operating efficiently, and this should drive continued earnings and cash flow growth in the future.

Speaking of the future, Texas Roadhouse also said its real estate pipeline should enable the company to add at least 25 restaurants in 2013. For full year 2012, the company expects comparable sales up between 4% and 4.5%, with adjusted EPS between $0.98 and $1.00. If investors have to choose between Texas Roadhouse and any of its competition, only one of its competitors offers the same type of growth and income: Brinker Internaitionl. However, what none of its competitors can claim is the company's small size and long runway for growth.

Investors looking for earnings growth who are not concerned about yield would do well to consider Buffalo Wild Wings. This company shows an expected growth rate of better than 20%, and sells at a relatively reasonable P/E ratio of about 26.

When it comes to Darden Restaurants, the big challenge for this company is that although its yield is higher than that of Texas Roadhouse, this yield might not be safe. The company has been running over 100% in its free cash flow payout ratio.

This leaves us with the choice between Bloomin' Brands and Texas Roadhouse. While analysts see Bloomin' Brands growing over 17% in the next few years, the company's operating margin is roughly half of what Texas Roadhouse offers investors. If this outperformance in operating margin continues, investors in Texas Roadhouse should see better growth in both earnings and cash flow. Texas Roadhouse is expected to grow earnings by 13% and pays an over 2% current yield. The company's strong results have also led analysts to increase their 2012 and 2013 estimates. Top line growth is expected to come in at better than 13% both years as well. With good organic growth, it's possible the company will exceed analyst earnings expectations going forward.

Texas Roadhouse only has 400 restaurants, which is less than half the number of some of its primary competitors. But with many years of growth ahead of it, you can see that this company offers a Texas-sized growth and income option to investors.

MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Buffalo Wild Wings and Darden Restaurants. Motley Fool newsletter services recommend Buffalo Wild Wings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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