Restaurant company Texas Roadhouse (TXRH -0.37%) has been an enormous winner over the last 10 years. However, I reluctantly admit that I missed out on big gains. And I have no one to blame but myself.
More than 10 years ago, Texas Roadhouse was one of the first stocks I ever bought. I held for many years and reinvested dividends along the way, which was a big win for my nascent portfolio. However, I sold my position during the first year of the pandemic because I thought the restaurant industry was in for a longer season of recovery.
Ultimately, I let short-term thinking cloud my long-term judgement -- it can happen to any of us. I've consequently missed out on big gains since I sold, as the chart below shows.
To be clear, Texas Roadhouse likely still has good days ahead, so investors today haven't "missed out" entirely. The company's core restaurant chain is highly profitable and still growing. And it's nurturing two small but promising restaurant concepts with Bubba's 33 and Jagger's, giving additional opportunity for long-term investors.
That said, I think it's fair to say that growth for Texas Roadhouse over the next 10 years won't be as big as the past 10 years. But for those looking for a new idea, the opportunity with Chicago's restaurant company Portillo's (PTLO -0.33%) is similar to investing in Texas Roadhouse 10 years ago. Here's why.
Why Portillo's could make a great stock pick
I want to establish some of the things that have made Texas Roadhouse a good business to invest in. First, these restaurants are popular. In 2013, locations made $4.3 million in average sales volume and same-store sales were up 3% for the year. Through ongoing same-store sales growth, average unit volumes are now a whopping $7.8 million -- I'd say that's pretty popular.
Portillo's can go toe-to-toe with Texas Roadhouse in this regard. As of the first quarter of 2024, Portillo's average unit volume is a whopping $9 million. And while first-quarter same-store sales were down a modest 1%, sales volume has consistently increased since it went public in 2021.
Second, Texas Roadhouse has a good profit margin at the restaurant level -- a metric that excludes expenses that aren't core to restaurant operations. Ten years ago, the company already had a restaurant-level profit margin of 17%. In the most recent quarter, it was still about 17%, which is encouraging.
Portillo's can hold its own here as well, even though it measures things differently than Texas Roadhouse. Portillo's is looking at adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Given how much this adjusts for, it will naturally be higher. With all of this said, Portillo's restaurant-level adjusted EBITDA margin is about 22% -- not too shabby.
The point is, Texas Roadhouse had (and has) great economics -- economics that are largely shared by Portillo's. When a restaurant chain has great unit economics like this, it can be a great investment as the chain expands. And that's what's coming up for Portillo's.
The upside potential
Portillo's has fewer than 90 locations today, relatively concentrated in the midwest. But someday, it hopes to have 600 locations -- that's a huge jump.
Granted, growth for Portillo's will happen at a measured pace. Management only expects to grow its restaurant base by 11% this year, and the growth rate could be comparable in the coming years. At this pace, Portillo's would still have fewer than 250 locations 10 years from now.
However, this may be all the growth that Portillo's needs for the stock to perform well. Consider that Texas Roadhouse had 420 locations at the end of 2013 and had 741 locations at the end of 2023 -- only a 76% increase over 10 years. Portillo's could feasibly grow more than this, given its smaller starting point.
One final consideration is valuation. Consider that 10 years ago, Texas Roadhouse stock traded at a downright cheap price-to-sales (P/S) valuation of just one. Today its P/S ratio has doubled to two.
TXRH PS Ratio data by YCharts
According to legendary investor Warren Buffett, a stock's valuation can have a big impact on an investment. If a valuation is expensive and comes down to more reasonable levels over time, it counteracts the positive impact of business growth. With this in mind, Texas Roadhouse stock benefited from a cheap starting place 10 years ago.
In the same way, investors who buy shares of Portillo's today are getting a good deal. The stock is flirting with all-time lows, and the P/S valuation is a paltry 0.9. That's a great price to pay for a restaurant company with great economics and ambitious growth plans for the long term.
In conclusion, I believe buying Portillo's stock today is like buying Texas Roadhouse stock 10 years ago. So, if you missed out on big investment returns from the popular steakhouse, don't miss out on big returns from this Chicago favorite.
