Thursday, January 26, 2006

Cracker Barrel (CBRL)

About a month ago, I highlighted Cracker Barrel as an interesting restaurant chain, an industry that I instinctively avoid. After all, can you think of an easier entry business? However, in this case, I made an exception.

Link-Too Many Seats

The stock was priced at that time at around $35. This is a decent business with a history of free cash flow as well as high ROIC for this industry (currently running just under 12% versus a 5 yr norm of about 10% and having reached 15% levels at times) As I pointed out in December, there is some uniqueness to the franchise, not just the Southern chatchke (I loved putting those two words together :) ) but the fact that the restaurant has performed so well in various consumer surveys.

Yesterday's announcement of a potential restructuring came as quite a pleasant surprise, needless to say.

CBRL Seeks Strategic Advice

Using rough back of the envelope calculations, the potential spin-off or sale of Logan's Roadhouse would be worth around $400-$450 million. This represents about 20% of CBRL's current market cap, but represents only about 15% of revenues.

There is real estate potential in CBRL (akin to the MCD's activism) as they own 384 locations. I have no independent way of assessing the value here, but Wall Street estimates (which of course came alive yesterday after ignoring the stock previously) seem to suggest about $400 million for the properties.

Once again, Wall Street's focus on short term earnings problems and the subsequent downgrades created a great opportunity for those of us who focus on long term cash flow generation and franchise value. Naturally, yesterday's news caused many analysts to jump on the buy bandwagon.

The strong cash flow generation history has allowed the company to return capital to shareholders in plentiful amounts ($750 million in share buybacks over 7 years and terrific growth in dividends.)

Though, at current prices the stock is fairly valued given its capital structure, there remains considerable potential in my opinion for a leveraged buyout or some type of capital restructuring which would result, in my estimation, in a value above $50.


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