and when you add in dividends, the total annual return balloons to 59.3%. This magnificent annual total return occurred during a time when the S&P 500 averaged a very attractive 18.8% capital appreciation.
The following price only graph for Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) since the beginning of 2012 shows how enticing Cracker Barrel’s stock price recently has been. Unfortunately, most investors only have “price only” graphs at their disposal. In a moment, I will show what a great disadvantage this can be.
The following earnings and price correlated F.A.S.T. Graphs™ illustrates the great disadvantage with “price only” graphs. When you look at stock price (the black line) in correlation to earnings (the orange line), you immediately discover that Cracker Barrel’s stock price crossed over the fair valuation line (the orange line) on approximately February 2013. Subsequently, the price has now risen to one of the highest valuations (current blended P/E ratio of 20.6) that Cracker Barrel has ever traded at. Since a picture is worth 1000 words, the graphic speaks for itself. Although Cracker Barrel’s stock price has on occasion risen above the orange fair value line in the past, it is never risen to this extreme before.
Another fact that this graph reveals relates to possible excuses or rationalizations as to why investors might currently be behaving this way. The pink line on the graph plots dividends per share, and here we see that Cracker Barrel’s payout ratio has recently exploded. To clarify my point, the green shaded area below the pink line represents the portion of earnings paid out to shareholders, a.k.a. the payout ratio. Cracker Barrel’s recent announcement in their third quarter fiscal year-end report that they raised their dividend by 50% to $.75 per share has apparently created some investor excitement. Déjà vu – irrational exuberance anyone?
Consequently, Cracker Barrel could be a poster child for those who now believe that the overall market has become overvalued because of the recent surge in stock price. As this series of articles has been attempting to point out, the overall market does not appear to be overvalued, but there are individual companies that are. Cracker Barrel represents one of those companies, in my opinion.
Interestingly, it’s amazing the difference a few months can make. Here is a link to an article posted by my associates at F.A.S.T. Graphs™ on October 19, 2012 when Cracker Barrel had an appropriate current P/E ratio of 14.6 and a market price of $66.98. Moreover, on October 19, 2012 Cracker Barrel’s valuation most importantly provided potential investors an earnings yield of 7%. In contrast, Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL)’s earnings yield today is only a sub optimal 4.9%.
Evaluating Cracker Barrel Utilizing Additional Fundamental Metrics
Let’s turn to FUN Graphs (fundamental underlying numbers) to further illustrate how raw statistics can mislead prospective investors. In addition to raising their dividend by 50%, the following graphic reporting common shares outstanding shows that Cracker Barrel has cut their share count from 62 million shares to 23 million shares in their most recent quarter (MRQ). Rising dividends and share buybacks are widely-accepted as shareholder-friendly behavior, which can be very attractive to prospective investors.
Beta is widely accepted as a measurement of risk by many stock market pundits. A high Beta implies higher risk, and a low Beta implies lower risk. More precisely, Beta is a measurement of volatility relative to the market, and a Beta of one is considered neutral. The following graph shows that Cracker Barrel’s Beta has fallen from 1.1 in fiscal 2009 to a Beta of .8 in fiscal 2012, and in its most recent quarter (MRQ) their Beta is .09. Consequently, just as Cracker Barrel’s stock price has risen to unjustifiable fundamental levels based on earnings, their Beta has steadily fallen, indicating that Cracker Barrel’s stock is less risky today than it was in 2009, 2010 and most of 2011. I believe that common sense indicates otherwise.
Common equity per share (ceqps) or book value is another major fundamental that many investors and pundits rely on to gauge the investment merit of a given company. Clearly, Cracker Barrel’s book value per share has grown from $4.15 per share by fiscal year-end 2008 to over $19.17 per share during the most recent quarter (MRQ). Therefore, we have another statistic arguing in favor of investing in this quality Consumer Discretionary in the restaurant subsector. We discover a book value that is growing at a compounded annual growth rate (CAGR) of 40.75% since the beginning of fiscal year 2008.
Next let’s look at another popular valuation measurement that many investors and pundits like to utilize, price-to-book value (pb). Here we discover that Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL), in spite of its highest P/E ratio in recent years, is simultaneously available at one of its lowest price-to-book values. Cracker Barrel’s fiscal year-end 2012 price-to-book value (pb) of 5.8 is much higher than its most recent quarter price-to-book value of 4.5. This would imply the Cracker Barrel is trading at one of its best valuations in recent history based solely on price-to-book value.
Moreover, a quick peek at Cracker Barrel’s market value over the same timeframe shows that a market value of $1.97 billion at its most recent quarter was its highest ever. However, since Cracker Barrel’s stock price has continued to advance since its most recent quarter, its current market value is now $2.36 billion (see earnings and price correlated F.A.S.T. Graphs™ above). Consequently, I would argue that Cracker Barrel’s highest market value ever in contrast to a low price-to-book value raises a red flag. In other words, further scrutiny is in order.
The point of the above exercise thus far is to illustrate how dangerous it can be to evaluate a business relying on any single widely-accepted statistic and/or fundamental metric in a vacuum. The majority of the fundamentals I covered above would indicate that Cracker Barrel is an extremely high-quality company that’s firing on all cylinders. My point being, that the performance of Cracker Barrel’s operations have been exemplary and I believe there is little argument about that.
However, from a shareholder’s point of view, when you measure price to the bottom line (earnings), we discover a clear picture of overvaluation. It is only through the combination of these clear correlations and functional relationships between the company’s earnings and price that we get a clearer picture of current value. And that picture says that Cracker Barrel is overpriced today. On the other hand, all of these other important fundamental measurements tell us that if we can ever find Cracker Barrel at a fair price based on earnings, that we should jump on it. I can tell a similar story with all of my top 10 overvalued favorite companies listed above.
Summary and Conclusions
When
