Missed Texas Roadhouse stock? Buy Portillo’s stock instead.

restaurant company Texas Roadhouse (TXRH 0.16%) There have been tremendous victories over the past decade. But I reluctantly admit that I missed out on a big gain. And I have no one to blame but myself.

Over 10 years ago, Texas Roadhouse was one of the first stocks I bought. I held on for several years and reinvested the dividends along the way, which was a huge win for my initial portfolio. But I sold my positions in the first year of the pandemic because I thought the restaurant industry would have a longer recovery period.

Ultimately, short-term thinking clouds long-term judgment. This can happen to any of us. As a result, we missed out on some big gains after the selloff, as you can see in the chart below.

TXRH data from YCharts

To be clear, Texas Roadhouse still has good days ahead of it, so investors aren’t completely “losing it” today. The company’s core restaurant chains are profitable and continue to grow. And with Bubba’s 33 and Jagger’s, we’re nurturing two small but promising restaurant concepts, providing additional opportunities for long-term investors.

That said, I think it’s fair to say that Texas Roadhouse’s growth over the next 10 years won’t be as great as it was over the past 10 years. But for those looking for new ideas, there’s an opportunity with a Chicago restaurant company. Portillo (PTLO 0.30%) It is similar to the investment we made in Texas Roadhouse 10 years ago. Here’s why:

Why Portillo’s Could Be a Great Stock Pick

I want to establish some of the factors that make Texas Roadhouse a good business to invest in. Firstly, this restaurant is popular. In 2013, each store averaged $4.3 million in sales, with same-store sales up 3% over the previous year. With continued same-store sales growth, average unit sales now reach a whopping $7.8 million. I’d say it’s pretty popular.

Portillo’s could rival Texas Roadhouse in this regard. As of the first quarter of 2024, Portillo’s average unit volume is a whopping $9 million. Although same-store sales decreased slightly by 1% in the first quarter, sales volume has continued to increase since listing in 2021.

Second, Texas Roadhouse has good profit margins at the restaurant level. This is a metric that excludes costs that are not core to running a restaurant. Ten years ago, the company was already achieving restaurant-level profit margins of 17%. The most recent quarter was still encouraging, at around 17%.

Portillo’s measures things differently than Texas Roadhouse, but it can hold its own here too. Portillo’s is looking at adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Considering how much this is adjusted, it will naturally go higher. Taking all of this into account, Portillo’s restaurant-level adjusted EBITDA margin of about 22% isn’t too shabby.

The point is that Texas Roadhouse has excellent economics, economics largely shared with Portillo’s. When a restaurant chain has excellent unit economics like this, it can be a great investment as the chain expands. And this is what’s coming for Portillo’s.

upside potential

Portillo’s currently has fewer than 90 stores and is relatively concentrated in the Midwest. But we hope to have 600 branches one day. This is a huge leap forward.

Of course, growth at Portillo’s will occur at a steady pace. Management expects its restaurant base to grow just 11% this year, and growth rates could be similar in coming years. At this rate, Portillo’s will still have fewer than 250 stores in 10 years.

But this may be all the growth Portillo needs for the stock to perform well. Texas Roadhouse had 420 locations at the end of 2013 and 741 locations at the end of 2023. This was only a 76% increase over 10 years. Portillo’s can grow much more than this because of its smaller starting point.

The final consideration is valuation. Consider that 10 years ago, Texas Roadhouse stock was trading at a very low price-to-sales (P/S) valuation of just 1. Today, the P/S ratio has doubled to 2.

TXRH PS Rate Data by YCharts

According to legendary investor Warren Buffett, a stock’s valuation can have a huge impact on your investments. If valuations are expensive and fall to more reasonable levels over time, the positive impact of business growth is offset. With that in mind, Texas Roadhouse stock has benefited from a cheap starting point a decade ago.

Likewise, investors who buy Portillo’s stock today are getting a good deal. The stock is at an all-time low and its P/S value is only 0.9. That’s a big price to pay for a restaurant company with great economics and ambitious growth plans over the long term.

In conclusion, I think buying Portillo stock today is like buying Texas Roadhouse stock 10 years ago. So if you’ve missed out on a big return on your investment at a popular steakhouse, don’t miss out on your chance to earn a big return at this favorite steakhouse in Chicago.