A somewhat rare visit to Cracker Barrel (CBRL) on Friday was yet another reminder of why I've been enamored of the casual dining chain for years. First, the place was packed. Second, I've never had a bad meal there.
The trick is to get my family to go with me, as some of them simply are not fans and would rather go across the street to Chipotle (CMG). I won this time, anyway.
I am a recovering restaurant bull. I learned many years ago that the sector is usually lights out coming out of a recession, and the rationale makes sense. During difficult economic times, restaurants close, and it does not matter if they are publicly traded or private. Capacity shrinks as consumers hunker down and eat in.
When the economy starts to turn, and consumers begin to open their wallets, the supply of restaurants expands in order to keep up with demand. The whole cycle repeats. In the meantime, multiples expand and restaurant investors are well rewarded.
This latest multiple expansion, however, is a bit long in the tooth. The restaurants seem crowded these days, and the consumer is still spending. But valuations in many cases, are simply out of whack. Growth has become too expensive, and I believe that the next leg will be down.
It's not just Chipotle, which is down 28% in the past three months yet still trades at 32x earnings, that may have difficulty. Some of the names that have reinvented themselves during the past several years also appear expensive. Denny's (DENN), which staged an incredible comeback several years ago -- in which I participated --trades at about 20x forward estimates. There is also Wendy's (WEN), which I also owned, but whose comeback has been long and painful. It trades at about 30x next year's estimate.
Domino's Pizza (DPZ) is another comeback kid, following a recipe change and a stellar advertising campaign. It trades at 27x. The list goes on, and it's not that any of these are bad companies; it's just that multiples have gone beyong reality.
Meanwhile, Cracker Barrel is humming along at 15x forward earnings. What's more, the stock currently yields 3.5%. The company ended the latest quarter with $127.5 million in cash and $412 million in debt, but that is more than compensated for, because of an impressive real estate portfolio, which includes 417 owned locations. That's not to say that Cracker Barrel would not be hurt in a publicly-traded restaurant stock repricing, it just may have a better floor than some other names, given its reasonable valuations, solid dividend yield and real estate portfolio.
I've owned Cracker Barrel for many years. Unfortunately, for the past several, it's been via a stake in Biglari Holdings (BH), which owns 20% of the company. Biglari has been thoroughly unsuccessful in ill-advised attempts to force change at CBRL as a thorn-in-the-side activist.
I'm not sure Cracker Barrel needs much change. Just ask investors who have owned the name the past five years, or beyond. Then, ask BH shareholders what their experience has been. But I'll save that story for another day.
