With investing, sometimes you have stocks that just don't go
your way. Things don't turn out how you
thought they would. We've all experienced this
before, some of us with different stocks.
For example, the investors in Dollar General had no clue the
stock was going to drop 37%. This came a little out of the
blue. The company suddenly didn't do
as well as investors were expecting.
Another one is Disney, which for years has given mediocre returns
despite having some of the best assets in the world.
This is another one I know has so far disappointed a lot of
investors. We all have these
disappointments, these companies that just don't go our way
despite our best efforts and best research.
And that's what makes it all the better when you have a stock
where everything just seems to workout.
And one of those stocks for me is Texas Roadhouse, a restaurant
company, a company that now is up 9.6% currently on the day the
day after their 2023 Q 4 earnings report.
Texas Roadhouse is in the green by 10% today, despite the market
being in the red. We have a note here from
Qualtrum saying the company's moving up today because of a
good earnings report and because different analysts are raising
their price targets on the stock.
Now I'm like any of you, I'm bummed when my stocks don't do
well. If one of my stocks is not
performing well, if the fundamentals are not moving in
the right direction, that really bums me out.
But on the other side, I'm of course thrilled when one of my
stocks does well. And Texas Roadhouse is one of
these companies that continually surpasses even my expectations.
I hold a very concentrated portfolio.
We have over $600,000 and only 12 companies with this level of
concentration. Of course, I have a very high
standard for each company I invest in.
But Even so, Texas Roadhouse is one of these companies that
genuinely surprises me. It surpasses my expectations
time and time again. I first started buying this
company in 2021 and it's already almost a double.
My holding value is 63,008 dollars and it's currently 2800
in the green. When I look through my purchase
history of the stock, I was buying it through many different
times, but the time where I really went heavy into it, where
I started doing really big buys in it was around May of 2022
when it was at a price of $75. Since that time period, Texas
Roadhouse stock has appreciated by roughly 90%.
That's roughly three times the performance of the S&P 500.
So this stock has really crushed the market recently.
It's done fantastic, but that's not the full story.
One of the more shocking facts that I like to share off because
I think it's so interesting to see this stacked up against each
other, is Texas Roadhouse against the S&P 500.
For the past decade, it hasn't just slightly beat the S&P 500,
it's completely crushed it. More shocking than that, it's
also beat the QQQ. So even the NASDAQ 100, all the
big tech companies, even if we hand picked some of the most
incredible companies over the past decade, ones that you would
want to own if you could go back in time, ones like Google going
back to 2013, Texas Roadhouse has still outperformed it.
It's hard to grasp the reality of the situation here.
A company that has absolutely nothing to do with leading
technology, nothing to do with artificial intelligence, nothing
to do with fintech or software in general, is continually
outperforming some of the best, most advanced companies in the
US markets. And the mechanics of how it's
able to accomplish this time and time again are very interesting.
In this episode, I want to dive into it.
What are the mechanics of Texas Roadhouse that make this company
generate market beating returns? There's something they're doing
that other stocks are not doing, and we're going to be breaking
it all down in this episode. Now I'm breaking down Texas
Roadhouse and the Secrets their incredible continual
outperformance. I think we first need to look at
some of the basics of what returns are and how they're even
generated in the 1st place. For this, I would recommend
downloading my Investment Philosophy presentation.
It's only 8 pages long and it's just a simple PDF file.
You can download it in the ping comment below, completely free,
no strings attached. On page 7 of this presentation,
I addressed intrinsic value and the core drivers of intrinsic
value. A company grows intrinsic value
by having organic revenue growth, free cash flow per share
growth, and the predictability of the company improving.
Meaning that if a company's growing its organic revenue,
they're growing without doing expensive acquisitions or paying
for their growth. They're growing by just growing
their core products, that's good growth.
If a company's also growing their free cash flow per share
and earnings per share, that's also very good growth.
And if they're doing this while also growing their Moat or the
predictability, that's also good growth.
So these three factors all determine the growth of the
intrinsic value and I think this is something that investors
continually get confused about. In many cases, novice investors
may look at companies that are at the forefront of technology
and they will suggest that AI is what generates returns.
Whatever company is the leading AI company or software, whatever
company has the most cutting edge software will generate
returns. Now those things are great,
those softwares and features and different things that companies
are creating, but they in and of themselves do not generate
returns unless the company can translate that AI and software
into money. They need to have a profitable
business model behind the AI and software.
Ultimately, it does not matter where it comes from or how it's
generated. What generates returns is
earnings and cash flow growth. If a company can grow its
earnings per share and it's free cash flow per share and it can
grow it steadily for a long period of time and a predictable
manner, that company will generate returns, whether it's
an AI company or a steakhouse. Ultimately, at the end of the
day, what matters is cash the money that the company earns,
and investors will not care whether or not that return comes
from artificial intelligence, selling cutting edge software or
from selling stakes. So while there's lots of money
to be made in cutting edge technology, there's also intense
competition within that industry.
With Texas Roadhouse, they've consolidated steakhouses into an
experience that's difficult to beat.
The value proposition is unsurpassed by any competitor.
The experience is on average much better than any competitor
because of the execution of this company.
And out of everything, I want to highlight with the incredible
performance of Texas Roadhouse, I think the biggest factor with
this company is execution. Execution is what's leading the
stock higher. On the second page of this
presentation, I have unattractive attributes in the
stock and many of them have to do with capital allocation and
execution of using cash. For example, I try to avoid
companies that have undisciplined use of cash flows,
companies that issue too much compensation to employees and
executives. You'll see these companies issue
hundreds of thousands of dollars per employee in stock based comp
far above a competitive pay. They also have fancy, expensive
offices, extravagant work parties.
They in some cases will invite celebrities and pay them
consulting or advertising fees. They invest into executive pet
projects, things the executives want to do not because they
believe they'll get a good return for their investors, but
because it's something they're interested in.
They also are in many cases unwilling to return excess cash
to shareholders. These are the undisciplined uses
of cash flow, and I believe the primary reason why Texas
Roadhouse has commanded such incredible performance over the
past decade is by avoiding these many sins that other managers
fall into wasteful uses of cash flow.
Texas Roadhouse is an example of excellent use of capital
allocation and cash flow. To illustrate how skilled these
managers are at effectively using their cash and generating
returns for investors, I want to take a look at this last
earnings report, the year of 2023.
The first thing they mention right at the top is they're
increasing the quarterly dividend by 11%.
This is a direct return of free cash flow back to the investor.
So simple way to look at this is the company generates free cash
flow every single quarter. We see these numbers right here,
100 million dollars, $11 million, thirteen million, 40
million. They're using some of this free
cash flow and returning it back to you directly through a
dividend. This direct payment back to you
in the form of a dividend is an incredibly direct way of
returning cash back to the shareholder.
You know that they're not using it for any tomfoolery.
They're not doing anything silly with it.
They're just giving you the cash directly back to your bank
account, directly back to your brokerage where it can be
reinvested into other opportunities.
And I've seen this happen over and over again with Texas
Roadhouse from when I first started buying the company
heavily, earning that $139 dividend, then 180-3185,
224-220-9239. It's going to go up another 11%
without me owning any more of the company.
So my next dividend is going to be around $265.
And I get these four times a year.
Now the reason that they can continually grow the dividend is
because they're growing their earnings and their cash flows at
an accelerated rate above the market.
This is another thing that's incredible about this company,
how efficiently and quickly they can grow.
For example, in the year of 2023, they grew their revenue by
15.4%. That is organic revenue growth,
meaning they're just growing their core business.
Their net income grew by 13%. Their diluted earnings per share
grew by 14.3%. Now they had a 2.1% dividend
yield starting that year. So you got 14.3% in earnings per
share plus another 2.1% in dividends.
A total return of 16.1%, a 16% return is above the average of
the market. The S&P 500 averages around 9 to
10% returns. A 16% is of course 60% above
that. And they've been doing this on
average for the past decade. This 16% total return is
completely in line with their historical average.
So it makes sense that a company that's returning far above the
rate of the market and doing it for a prolonged period of time
is beating the market, especially when this company in
question has a valuation that's around the same of the market.
The earnings per share this year came in at $4.54.
If we bring up the earnings per share on Qualtrim, we don't have
the latest data in because it was just today.
But if we look at 2023, that would put it right around here,
a nice step up from the previous years, a 14% increase year over
year. You can see that this company
has the earnings per share growth that clearly looks like a
compounding machine. But how do they accomplish this
growth? How does this company grow
earnings per share so quickly for so long?
There's a lot of explanations you can use, but I think one of
the most simple ones is people love steaks.
They really, really love steaks. Maybe if you're outside of the
US, you don't understand this as much, but at least inside of the
US, we still like steaks. I call this Turf and Turf.
It's a 16 ounce T-bone and a 24 oz Porterhouse.
Also whiskey and a cigar. I'm going to consume all of this
at the same time because I am a free American.
Obviously this is a bit exaggerated, but the point is we
really like our steaks here. When I put together my quick
notes on my bold thesis on Texas Roadhouse, it was very simple.
I said that I think affordable steaks will never go out of
style. Consumer food habits are
unlikely to change. That's something that I continue
to believe is just as applicable and true today as it was three
years ago when I first bought the company.
Affordable steaks are always going to be in style.
It's just never going to change. We also have the the threat, the
competitive threat of different products like Ozempic and GLP
One Appetite suppressive drugs. But a lot of people highlight
the potential of these drugs without highlighting the
potential struggles of these drugs.
First of all, they are very expensive.
They require dedicated usage, and they have many side effects
when people use them. Many cases people report nausea
and nobody wants to go through everyday feeling nauseous.
I've never believed the appetite suppressants would be
meaningfully damaging to Texas Roadhouse, and so far even with
people using these drugs, it doesn't seem like that's the
case. Texas Roadhouse is also
expanding internationally. They're still doing this today.
They're opening up Bubba's 33 brand.
It's successful. They're opening up more Jaguars,
their new franchise quick service restaurant brand, and
it's opening up with 4.5 stars. People really like the foods
that they make. Another thing that I think is a
constant something that will never change is the restaurant
experience. No matter what happens with AI
and artificial intelligence and different things we can do
within our house, people still want to get out and go to a
restaurant, and Texas Roadhouse is more of a lively place to go
have a restaurant experience. As long as these things hold
constant, which I think they will, I believe this company is
going to continue having good returns.
And again, the majority of these returns are the result of
incredible execution. After this latest quarter, I was
so impressed by the earnings report that I went to listen to
the earnings call. When I was listening to the
earnings call, I heard a management team that seems to
have everything figured out. They have everything put
together. I want to go through some of the
highlights that I think are a bit less obvious when listening
to this call. First of all, if we just
breakdown what they've done over the past year, they said that
they grew earnings per share by 14.3%.
The dividend yield of 2.1% = a total return of 16.4%.
They said in this return that this is consistent with their
long term historical average return and they believe in the
future. Going forward, we are confident
that we can continue to reward our investors with strong
returns for years to come. So they didn't say that this is
unlikely to be repeated, that this is an outlier.
They said no, this is what we do.
This is the type of returns we generate and we're very
confident in our ability to repeat this in the future.
Now of course we don't know for sure if they can, but that's
their thoughts about the future. They also mentioned that in the
year of 2023, they currently ended the year with $104 million
in cash. So they have a lot of money in
cash. For a company of their size
above $100 million is a lot of cash to work with.
They self funded $347 million of CapEx.
Self funded means that they did not take out leverage.
They didn't take out loans, they simply use their cash flows to
pay for it. They also self funded $39
million purchase of eight franchise restaurants.
So they are buying their franchise restaurants because
they know they get a positive ROI.
They also returned $147 million in dividends and did $50 million
in share buybacks. This is a company with a huge
cash balance and no debt, self funding.
Their CapEx expense growing organically and returning money
back to the investors through share buybacks and dividends.
They mentioned a couple other things about the future.
They said they're accelerating their digital kitchen
conversions. This makes it easier for them to
fulfill delivery, DoorDash and Uber.
It also makes it easier for their restaurants to fulfill to
go orders. So they're now converting around
200 new restaurants to this digital kitchen to go orders is
now also $1,000,000 business per restaurant.
That's a pretty big business and they're continually growing
this. That's nice for them because it
doesn't occupy space in their restaurant.
They can serve more customers that way.
Now one of the downsides of this year was CapEx expense was much
higher than last year. They were asked about this on
the earnings call and I thought it was really interesting the
answer they gave. They listed out a few reasons
that CapEx is going up. One of the biggest expenses in
growing this brand is building new restaurants.
And they said it's a lot more expensive to build these
restaurants today than it was three years ago.
Building costs, labor, parts, all of that has inflated over
time. That's something they cannot
fix. They can't change how much it
costs to build their restaurants.
Another issue is Texas Roadhouse is a bit of an old brand.
They've been around for a long period of time and many of their
restaurants are simply old. They're just aging.
They need updating and repairs. So there's higher expense of
servicing these older restaurants.
And then also they're building their newer restaurants 10%
bigger than their prototypes a year ago.
They're finding that these 10% bigger restaurants allow them to
earn a much higher ROI. So they're investing and
building even bigger restaurants because they're getting a better
return doing. So Now on the positive side,
even with the higher expense of building these new restaurants,
the new restaurants are performing incredibly well.
They're exceeding their cost of capital and their target
internal rate of return of the high teens.
So these new restaurants are still returning above the high
teens in IRR, which is a very strong return for the capital
they're putting in. So this is a nice way of saying
even though these restaurants are becoming more expensive, the
returns they're getting for them more than make up for it.
Now, another thing they mentioned on the call is that in
the year of 2024, Texas Roadhouse has an extra week of
reporting and they're estimating that that extra week will add on
an additional 4% EPS for the full year.
So when you're looking at your analysis of earnings per share
growth, just keep that in mind that it's going to be a little
bit higher because they're reporting a full extra week.
And then so far in 2024, when asked about any type of slowdown
or concerning trends or people spending a bit less money,
they've seen none of it. No slowdowns, no mixdowns in
their products, no concerning trends.
As far as they're concerned, they're off to a great start.
So there's a lot of different things we can look at with this
most recent quarter. But overall, what's generating
these great returns is a combination of their great
brand, their great customer service, their great product,
combined with incredibly good capital allocation.
Capital allocation is the key ingredient in this mixture.
It's the key thing driving these returns.
If Texas Roadhouse did what many other restaurant companies do
and acquire brands, acquire different companies, they're
always going out buying different things and doing it at
expensive prices, they would have subpar returns.
But the fact that they're focused on growing out their own
brands internally, ones that they've developed like Bubba's
33 and Jagger's ones that are not expensive to develop and
grow, they have a high amount of return potential with very low
downside. Now with all that, the stock
today is at $147. It's up a staggering 23% year to
date, 41% over the past year, not counting dividends.
So this company has been on A roll, but where does it stand
now? When I did my intrinsic value
estimates on all my companies, I had Texas Roadhouse at an
intrinsic value of 1, $135. That's where I thought it was in
the range of fairly valued. But I believe the company has
grown its total return around 16% and I believe the intrinsic
value has moved up 16% year over year.
So 135 + 16% is around 1:55. So I think it's worth around 155
now. And the company trades at 1:47,
which means that even though it's moved up 11%, I still don't
think the company's trading at a crazy valuation.
Now, I'm not currently buying into the stock because I was
able to buy this one on a substantial dip, but I'm going
to continue holding it in My Portfolio.
I see no reason to be pressured into selling this one right now.
As far as I can see with Texas Roadhouse, it's a continual
example of excellent Capital Management, a company that
continues to do the right thing on behalf of the shareholders.
And it seems to me today that the company has as bright of a
future as ever. I'm really thrilled with the
performance of this company, and I know sometimes with investing
companies don't go your way. It's not always easy or fun.
Not every stock you buy rockets up, so I think it's good to
celebrate and be happy about the time your thesis's work out.
For me today, that thesis is Texas Roadhouse.
I may go there this evening and celebrate with a steak.
That's all for this episode. See you in the next one.