Thursday, August 27, 2009

Cracker Barrel Old Country Store: Example Of A Muted Response To Upgrade

Cracker Barrel Old Country Store, the operator of a chain of restaurants and retail stores, was the beneficiary of an upgrade eight days ago. The upgrader, Bryan C. Elliott of Raymond James, reclassified it to "Market Perform" from "Underperform." Since then, the stock has moved from $27.59 to today's $29.13. The response has been muted, but it could be argued that the upgrade was muted too. Suffice it to say that Cracker Barrel has moved up, but not by much.

The company hasn't done all that badly in the last ten years, despite some restructurings that lopped a fair bit of earnings from its continuing-operations record. Absent discontinued operations, 10-year 1999-2008 EPS growth (as calculated by logarithmic regression) was 12.62%; the current P/E is 10.35. Return on equity over the same time period, as calculated by a 10-year sum of net incomes divided by a 10-year sum of shareholder's equities, was 15.23%. Quarterly EPS for the latest reported quarter, which ended May 31st of this year, was up 13.0% from the EPS of the same quarter a year previously. Operations cash flow for the nine months ending May 31st was up 7.47% from the same period last year, and free cash flow was up almost 75% due to a large drop in capital expenditures. EPS growth hasn't slowed down.

The company's balance sheet would give a value investor pause, though. Its current ratio, as of May 31st, was only marginally above 1. The quick ratio was below 0.5. The debt-equity ratio is 6.77 to 1; debt as a percentage of total capitalization is an eye-opening 87.1%. If this company does stumble, it could get itself into a repayment crisis. Shifting to the earnings side, its earnings before interest and taxes was 2.28 times interest expense as of May 31st. The high leverage has likely been justified by earnings power, as 2.28 isn't a very uncomfortable margin. Provided the company doesn't stumble on the earnings front.

The upgrade itself, and its effect on Cracker Barrel's stock price, shows one of the weak points of technical analysis. A downtrend on the chart shows a stock getting lower-priced over time. If the fundamentals have't changed, then said downtrend shows a stock getting cheaper over time. The reason given for the upgrade was Cracker Barrel moving into fairly-valued territory.

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