company’s ability to grow sales & profits amidst falling traffic, CBRL could easily meet or even surpass these expectations simply by finding new ways to attract customers into their restaurants. Add in the 2.9% dividend yield and its clear why CBRL is on this month’s Most Attractive Stocks Model Portfolio and could be an excellent portfolio addition.

Buy Back Plus Dividend Could Yield Over 3%

In 2016, Cracker Barrel repurchased nearly $15 million worth of stock. As of 2Q17 the company has $25 million remaining under its current authorization but has not repurchased any stock through the first six months of the company’s fiscal 2017. If Cracker Barrel were to keep its repurchase activity consistent with 2016, the remaining authorization will last just under two years, and the firm would repurchase a total of $15 million per year. A repurchase of this size is 0.4% of the current market cap. When combined, Cracker Barrel’s 0.4% repurchase yield and 2.9% dividend yield offer investors a total potential yield of 3.3%

CBRL’s Geographic Mix Could Lead to Outperformance

National Restaurant Association projects restaurant sales, across the nation, to grow 4.3% in 2017. 60% of Cracker Barrel’s stores are in regions where the National Research Association estimates sales growth to be at or above average: the South Atlantic, East South Central, and Mountain regions.

Cracker Barrel is well positioned to grow faster than the national average. Add in effective cost management, and CBRL has the potential to beat both top and bottom line expectations.

Beating bottom line expectations has boosted the stock significantly in the past. When Cracker Barrel reported company 1Q17 EPS above consensus, the stock rose 11% over the following three weeks. In 3Q16, when Cracker Barrel also surpassed consensus EPS estimates, the stock rose 12% in the following week.

With new initiatives such as an upcoming billboard campaign aimed at driving traffic, exclusive merchandise in its retail stores, and new product offerings around the holidays, CBRL could be poised for another beat and subsequent increase in valuation.

In the meantime, investors in this stock carry very low valuation risk and are rewarded with a potential 3.3% yield when combining the 2.9% dividend yield with the 0.4% share repurchase yield.

Insider Trends Minimal While Short Interest Shows Market Pessimism

Over the past 12 months, insiders have purchased 95 thousand shares and sold 81 thousand shares for a net effect of 14 thousand insider shares purchased. These purchases represent less than 1% of shares outstanding. Additionally, short interest sits at 4 million shares, or 18% of shares outstanding. It would appear the market is buying into the fear of weak restaurant sales despite Cracker Barrel’s track record of profitability.

Impact of Footnotes Adjustments and Forensic Accounting

Our robo-analyst technology enables us to perform forensic accounting with scale and provide the research needed to fulfill fiduciary duties. In order to derive the true recurring cash flows, an accurate invested capital, and an accurate shareholder value, we made the following adjustments to Cracker Barrel’s 2016 10-K:

Income Statement: we made $60 million of adjustments, with a net effect of removing $28 million in non-operating expense (1% of revenue). We removed $16 million in non-operating income and $44 million in non-operating expenses. You can see all the adjustments made to CBRL’s income statement here.

Balance Sheet: we made $614 million of adjustments to calculate invested capital with a net increase of $458 million. The largest adjustment was $450 million due to operating leases. This adjustment represented 40% of reported net assets. You can see all the adjustments made to CBRL’s balance sheet here.

Valuation: we made $948 million of adjustments with a net effect of decreasing shareholder value by $870 million. Apart from total debt, which includes the operating leases noted above, one of the notable adjustments was $39 million in excess cash. This adjustment represents 1% of Cracker Barrel’s market cap. Despite the net decrease in shareholder value, CBRL remains undervalued.

Attractive Funds That Hold CBRL

The following funds receive our Attractive-or-better rating and allocate significantly to Cracker Barrel.

  1. First Trust RBA Quality Income ETF (QINC) – 2.9% allocation and Attractive rating
  2. Ivy Mid Cap Income Opportunities Fund (IVOIX) – 2.8% allocation and Attractive rating
  3. Jensen Quality Value Fund (JNVIX) – 1.4% allocation and Very Attractive rating.

This article originally published on March 29, 2017.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

Article by Kyle Guske II, New Constructs

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