Takeaway: $TXRH is facing significant headwinds from here

After doing a better-than-bad job on Texas Roadhouse in 2011, we did not have a view on the stock coming into 1Q12 earnings and missed a sizeable pop in the share price.  On the category more broadly, we have held a cautious-to-negative view since our 4/20/12 note, “CASUAL DINING CAUTION”.


Category View


Over the intermediate-to-long term, our bearish stance is dictated by slowing demographic trends and a difficult macroeconomic outlook.  Casual dining has not underperformed the market since our 4/20 note but we believe the heightened volatility in the group has been worth avoiding.  On the positive side, Brinker, a long-time favorite of ours, has managed to sustain a relatively smooth upward trajectory over the same time period and remains our favorite stock in casual dining.





While our caution on casual dining was a couple of months premature, we remain bearish today as several factors are serving as headwinds for the group.  We detail those factors below.


Demographics:  Before he exchanged un-pleasantries with his shareholders, CEO Clarence Otis spoke about Darden and casual dining’s position within the restaurant industry.  The declining number of baby boomers with high levels of disposable income, and the headwind that that represents for restaurant chains that are not adapting to the preferences of the increasingly Millennial-dominated consumer base.  This is a negative for all companies in casual dining that are supporting concepts that are struggling to stay relevant.


Labor Market:  The U.S. economy is, from a growth perspective, on life support as Federal Reserve interventions continue amidst much-less-than-satisfactory jobs growth. 


Gasoline Prices: Gasoline prices are above 2008 levels and 16% higher than they were on June 30th. We believe that this poses a significant risk to continued growth in the economy.  Given the discretionary nature of expenditure at casual dining restaurants, the corollary to this is a negative view on the category’s share of the consumer’s wallet.



Casual Dining Conclusion: As the group deals with adverse demographic and macroeconomic factors in the near-, intermediate-, and long-term, investors will likely seek out companies that are taking share and differentiating themselves from the herd in what has become a heavily-oversupplied industry.



Texas Roadhouse


Specific to Texas Roadhouse, beyond the issues facing the category, we see the following issues as important for investors:

  1. Food Inflation
  2. Highly Competitive Sub-Category
  3. New Unit Volumes and Returns

At this point we would advise clients to avoid TXRH on the long side.  The charts and text below elaborate on our thoughts specific to the company.


Earnings Revisions and Sales Trends:


We do not expect earnings estimates to rise from here as beef inflation accelerates and same-restaurant sales bump up against difficult weather compares.  Bloomin’ Brands coming public (and putting Outback Steakhouse’s best foot forward) is increasing discounting at a time when the Restaurant Value Spread (CPI Food at Home less CPI Food Away From Home) is negative and declining further, lessening the pricing power of restaurants within the food complex. 


TXRH: WHERE TO FROM HERE? - TXRH price estimates fy12 fy13





Capital Spending Accelerating Far In Excess of Sales Growth


One of the red flags in our assessment of the sustainability of Texas Roadhouse’s growth trajectory is a sustained period of capital expenditure growth unaccompanied by commensurate sales growth.  In 2011, the company took a decision to restart unit growth and the company has now seen capital spending grow faster than revenues for six straight quarters.  Importantly, as of last quarter management is saying that the new units are not performing as well as the broader unit base.  On the 2Q call, Texas Roadhouse CFO Price Cooper said, “While our newer restaurants continue to open strong, as they move through the honeymoon period and their sales normalize, their base is slightly less than existing restaurants.”  We believe that there is risk to the stock’s multiple if returns decline.


TXRH: WHERE TO FROM HERE? - txrh capex sales growth



The Stock Price Should Trend In-line with Returns


The net result of the bifurcation between capital spending growth and sales growth is declining returns on incremental invested capital.  Our view is that, from a shareholder perspective, tying unit growth to a more conservative expectation of sales growth and returning surplus cash to shareholders would be a more attractive strategy.


TXRH: WHERE TO FROM HERE? - txrh roiic



Accelerating Food Costs Are Presenting a Challenge For Margins


There is a no relief in sight for the company when it comes to higher beef prices.  Over the past couple of quarters, the company has been able to manage labor costs, but slowing sales and industry headwinds are likely to exacerbate the impact of rising food costs.  Our expectation from here is for restaurant level margins to decline under pressure from rising input costs and a difficult top line environment. 





Beef is a significant driver of input cost inflation for TXRH.  In March, the company had the following to say: 


Now, the not-so-good stuff-food inflation up approximately 8%. That's primarily beef driven and most of you probably are aware of that. There has been significant inflation in the beef markets, live cattle markets. I suspect that'll be little a bit continued in 2013 until herds get rebuilt of cattle, so we may have to bear with that for a while and we will.


We expect beef prices to remain elevated as herd sizes are depleted and will likely take several years to rebuild.  From a pricing standpoint, for a couple of reasons, we believe it may be difficult for Texas Roadhouse to take additional pricing to protect margin.  First, competition in the steak category is fierce with Outback in the public arena once again and non-traditional competitors like Chili’s launching steak at their restaurants.  Secondly, while Texas Roadhouse likely does not compete with grocery as directly as some other casual diners, the Restaurant Value Spread (CPI FAH less CPI FAFH) is indicating that traffic in casual dining, as measured by Malcolm Knapp, is likely to decelerate over the next six months or so.  For TXRH, the chart below seems to indicate that a sequential slowing of comps is possible as consumers encounter less inflation in the grocery aisle than at the restaurant.





The Stock’s Valution is Cheap, Probably for a Reason


TXRH is being touted as “cheap” by some in the investment community but, as is the risk with valuation, estimates may be overly bullish as sales slow and inflation accelerates.


TXRH: WHERE TO FROM HERE? - casual dining valuation TXRH



Howard Penney

Managing Director


Rory Green



Financials And Presidents

Takeaway: Clinton takes the cake, with financials growing +366% over his two terms.

 Today, Hedgeye held an election call with Director of Research Daryl Jones, Financials Sector Head Josh Steiner and Healthcare Sector Head Tom Tobin to discuss different aspects and metrics of the upcoming 2012 election. Steiner examined the different returns in the financials sector over each different presidential administration. Here’s what we found:


-During Reagan’s two terms, financials grew 354%

-During Bush’s (H.W.) term, financials grew 96%

-During Clinton’s two terms, financials grew 366%

-During Bush’s (W) two terms, financials fell -74%

-Thus far, during President Obama’s first term, financials have grown 109%



Financials And Presidents - STEINER election

VEGAS: Taxi Tables

Takeaway: Recent data shows taxi trips are down, so we think gaming revenues could be flat or slightly down for August due to the correlation.

Gaming, Lodging and Leisure Sector Head Todd Jordan put out an interesting chart yesterday that shows the correlation between taxi trips on the Las Vegas Strip and table play. Looking at the chart below, you can see that as taxi trips increase, so does table play. The correlation between the year-over-year change in taxi trips and non-baccarat table drop is 0.68 over the past 5 years; strong enough to warrant our attention.


The most recent data shows taxi trips are down -1.7% sans McCarran Airport data. Assuming there’s no extraordinary circumstances, gaming revenues could be flat to slightly down with normal hold for August.


VEGAS: Taxi Tables  - taxitables

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Materials for Today's Presidential Election Preview Call

Takeaway: Materials for today’s Presidential Election Preview Call.


  • Materials (follow the link): Analyzing The 2012 Election
  • Today, September 19th  
  • 11 a.m. EST
  • Participant Dialing Instructions
    • Toll Free Number:
    • Direct Dial Number:
    • Conference Code: 324541#

Materials for Today's Presidential Election Preview Call  - obama romney 300x200


Based on the major impact of U.S. policy on global financial markets, our Macro Team, Financials Team, and Healthcare Team will join forces and dissect the most likely scenarios leading into and out of the 2012 Presidential Election.


Our Global Macro research process at Hedgeye focuses on three key factors: growth, inflation, and policy.  As our Director of Research, Daryl Jones, has noted, the policy and/or perception of future policy is often the most critical factor to handicap.  In the United States, the President, and his or her party (if they control Congress) have the power to set the economic agenda and fiscal outcomes.  Moreover, they appoint the Federal Reserve Board which has increasingly-politicized control of monetary policy.


For additional information regarding this call or any other upcoming Hedgeye event please email .  


"In America, anybody can be president. That's one of the risks you take."

-Adlai E. Stevenson


Strength In Syncrude

Takeaway: Production issues and low supply are propping up the syncrude premium for now, but don't expect it to last forever.

Syncrude is the light, sweet crude oil benchmark in Western Canada. Since August, the product has been very strong and now trades at a $14+ premium to WTI crude oil when normally the discount hovers around $2. That’s huge – so why the strong demand? Energy Sector Head Kevin Kaiser explains:


“Strength is attributed to a slew of maintenance going on at Alberta’s heavy oil upgraders, which upgrade bitumen into a light crude (there’s a lower supply of Syncrude hitting the market right now).  Nexen/CNOOC’s Long Lake upgrader and Suncor’s Fort Mac upgrader are down for planned maintenance, and reports are that there are some operational issues at COS’s Syncrude facility that will reduce output there as well.  The plants should return to normal operations in 4Q12, so we don’t expect the Syncrude premium to hold for long.”



Strength In Syncrude  - syncrude



Problems at plants, lower supply; these things mean syncrude is at a premium at the moment. When all fades back to normal, expect that $14 premium to WTI to lower significantly.


Taking Issue With Oil







We put out a note on our website this week discussing oil sentiment and how the current price of WTI crude oil was rather high. We then noted that there would be a good opportunity to short oil soon and sure enough, a few hours later, oil fell fast and hard taking WTI down several dollars. Some claim the drop was due to rumors regarding the Strategic Petroleum Reserves being opened but the way we see it, the issue is correlation risk. Move the US dollar and it’ll move commodities, including oil, in turn. It doesn’t take a massive move in one asset class to greatly affect another.




Our Hedgeye Election Indicator put up a +220 basis point increase in Obama’s chances of being reelected yesterday, propelling the odds to 63%. This is an all time high for the HEI and in line with InTrade standings. It is beginning to look like Obama will cruise into November and will nab a second term as Commander-In-Chief. It certainly doesn’t help that someone recorded Mitt Romney at a private fundraiser with Mitt speaking off the cuff. Like we’ve said before: if only Mitt would focus on strengthening the US dollar and getting rid of Ben Bernanke more, then he might have a real shot and Obama’s odds wouldn’t be at all time highs. Unfortunately, it may be too late for Mitt…







Cash:                  Flat


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“JP Morgan's strategists are smart, but they can garble English as well as any analyst. This week: "exhibits stationary" for "doesn't move”” -@jmackin2




“The world is a tragedy to those who feel, but a comedy to those who think.” –Horace Walpole




UK inflation for August slows to 2.5%, in line with expectations.




Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.45%
  • SHORT SIGNALS 78.38%