It’s not often investors get the chance to buy leading businesses at significant discounts. Investors willing to look past the dip in economic activity can find great value. We recently highlighted aleading restaurant operator poised to excel during the widely expected economic recovery.
This week, we’ve identified another restaurant, providing a more home-style experience, positioned to survive the crisis and grow profits during the recovery. Cracker Barrel Old Country Store (CBRL: $97/share) is this week’s Long Idea.
CBRL’s History of Profit Growth
We first featured CBRL as a Long Idea in March 2017 and closed the position in June 2018. CBRL was recently featured in our June 2019 article “3 Undervalued Stocks in the Restaurant Industry.” Now, with CBRL down 37% year-to-date (YTD), it trades at its cheapest valuation in years, as measured by price-to-economic book value (PEBV). For investors willing to look past the current crisis, CBRL represents a great buying opportunity.
Prior to the COVID-19 outbreak, CBRL had a strong history of profit growth. Over the past decade, CBRL grew revenue by 3% compounded annually and core earnings by 12% compounded annually, per Figure 1. The firm increased its core earnings margin year-over-year (YoY) in eight of the past ten years, and its core earnings margin of 7% over the trailing-twelve-months (TTM) is up from 4% in 2010.
Figure 1: CBRL Core Earnings & Revenue Growth Since 2009
Sources: New Constructs, LLC and company filings
CBRL’s rising profitability helps the business generate significant free cash flow (FCF). The company generated positive FCF in each of the past 10 years and a cumulative $1.1 billion (47% of market cap) over the past five years. CBRL’s $145 million in FCF over the TTM period equates to a 4% FCF yield, which is significantly higher than the Consumer Cyclicals sector average of 1%.
Executive Compensation Plan Incentivizes Prudent Capital Stewardship
No matter the macro environment, investors should look for companies with executive compensation plans that directly align executives’ interests with shareholders’ interests.
Quality corporate governance incentivizes executives to create shareholder value and are held accountable for capital stewardship.
In fiscal 2019, performance shares made up 50% of CBRL’s long-term incentive program. These performance shares are tied to the company’s return on invested capital (ROIC). CBRL has included ROIC as a performance metric in its executive compensation plan since 2011, over which time CBRL has improved ROIC from 9% in 2011 to 14% TTM. The focus on improving ROIC aligns the interests of executives and shareholders and helps to ensure quality capital allocation.
Cracker Barrel’s Balance Sheet Provides Ample Liquidity to Survive the Crisis
Companies with strong cash flows and minimal debt are better positioned to survive macro-economic uncertainty. To conserve liquidity and ensure it has the cash to survive the current disruptions to operations, CBRL has suspended its dividend and share purchase activity. The firm also recently announced that it borrowed the remaining available amount under its Revolving Credit Facility, which gives the firm ~$400 million in cash available for ongoing operating needs.
In CBRL’s latest quarterly filing, the firm spent $210 million on store operating and general and administrative expenses. In a worst-case scenario, where CBRL is forced to close all its stores, furlough/lay-off workers, and generates no revenue, its current cash could cover these expenses for nearly six months before needing additional capital. It is very unlikely that CBRL’s revenue would go to zero since the firm is currently providing to-go and delivery options and selling retail goods through its e-commerce store.
Furthermore, CBRL is heavily concentrated in states that have already announced, or are actively seeking dates, to reopen dine-in restaurant capacity. Based on these announcements, 28%-43% (depending on decisions in North Carolina and Florida) of CBRL’s restaurants could re-open for dine-in service in May.
This article originally published on April 29, 2020.
 Our core earnings are a superior measure of profits, as demonstrated in In Core Earnings: New Data & Evidence a paper by professors at Harvard Business School (HBS) & MIT Sloan. The paper empirically shows that our data is superior to “Income Before Special Items” from Compustat, owned by S&P Global (SPGI).
Disclosure: New Constructs
Disclosure: David Trainer, Kyle Guske II, Sam McBride, Andrew Gallagher, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
About New Constructs
Our stock rating methodology instantly informs you of the quality of the business and the fairness of the stock’s valuation. We do the diligence on earnings quality and valuation so you don’t have to.
In-depth risk/reward analysis underpins our stock rating. Our stock rating methodology grades every stock according to what we believe are the 5 most important criteria for assessing the quality of a stock. Each grade reflects the balance of potential risk and reward of buying that stock. Our analysis results in the 5 ratings described below. Very Attractive and Attractive correspond to a “Buy” rating, Very Unattractive and Unattractive correspond to a “Sell” rating, while Neutral corresponds to a “Hold” rating.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from New Constructs and is being posted with permission from New Constructs. The views expressed in this material are solely those of the author and/or New Constructs and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.