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.