Investors should look at valuation multiples when deciding whether to enter or exit a stock. Valuation multiples are driven by perceived growth, risk and uncertainties, and investors’ willingness to pay.
There are various multiples available to evaluate a stock. We’re choosing the PE (price-to-earning) multiple due to the high visibility of Texas Roadhouse’s (TXRH) earnings. The forward PE multiple is calculated by dividing the current share price with the forecast EPS (earnings per share) for the next 12 months.
TXRH’s PE multiple
The slowing same-store sales growth trend in June and July, and the softening of growth in the restaurant industry, could have made investors skeptical about Texas Roadhouse’s future earnings. Even the better-than-expected 2Q16 results and the rising EPS estimates for next four quarters by analysts failed to impress investors.
On August 2, 2016, the company was trading at $41.80, down 12.4% from its previous day’s closing price. This led to a decline in Texas Roadhouse’s PE multiple from 25.3x to 22.1x.
In the next four quarters, analysts are expecting Texas Roadhouse to post EPS of $1.90, which represents a growth of 15.2% from the same quarters in the previous year. The current share price could have factored in these growth rates. If the company’s results come in lower, the stock could face selling pressure. That could bring the PE ratio down, and vice versa.
In the final part of this series, we’ll look at what analysts are recommending for Texas Roadhouse after its 2Q16 results.