By Matt Doiron
Sardar Biglari's Biglari Holdings purchased just over 48,000 shares of sit-down restaurant Cracker Barrel (CBRL) this week through its restaurant subsidiary Steak n Shake. At an average price of $59.93, Biglari committed just under $2.9 million to buying these shares. Previously, the holding company as a whole had owned close to 4 million shares, meaning its stake in the $1.4 billion market cap company is now worth about $250 million. A proposed poison pill provision currently in effect but subject to approval at Cracker Barrel's annual meeting would cut off Biglari from acquiring more than 20% of the company's shares, a target he is approaching. The investor has been engaged in a takeover campaign against Cracker Barrel for about a year, based on the belief that the company is mismanaged. He has been consistently adding stock so far in 2012 (research his buying activity).
Cracker Barrel and other sit-down restaurants have been facing issues in the recent past. While the U.S. restaurant industry has been growing recently, much of the growth has been related to quick service restaurants: standbys like McDonald's (MCD), upstarts like Chipotle (CMG), and the like. The theory that this move has been driven by American consumers being more pressed for time and money, and that these trends will continue in the future, has tended to drive the multiples of quick service restaurants above those of sit-down restaurants as well.
Cracker Barrel's third quarter ending in April 2012 reported increases in revenue and income compared to the third fiscal quarter of the previous year, with earnings per share rising over 25%. Revenue and earnings are both up for the year so far as well, with most of the gains coming in the larger restaurant segment (Cracker Barrel's restaurants generally include company-owned and company-branded retail stores, which have experienced little growth so far this year). Currently, Cracker Barrel's trailing P/E is under 17 despite a 2.7% dividend yield and a growing business. Wall Street analysts expect that earnings will continue to grow and their earnings estimates imply a forward P/E of about 13.
Hedge funds have largely been wary of getting involved at Cracker Barrel, with no fund holding a position of at least $16 million as of the end of March. The two funds with the largest positions were Two Sigma Advisors and Robert Jaffe's Force Capital, which owned between 260,000 and 280,000 shares. Two Sigma initiated its position in the first quarter of 2012 (see what else Two Sigma owned) while Jaffe, former director of research at Steven Cohen's SAC Capital Management, more than doubled his position (find Jaffe's other stock picks). It is possible that these hedge funds are buying into the stock on the belief that Biglari can either execute a takeover or force further reform and increases in shareholder value on Cracker Barrel. Another notable investor in the company is Gotham Asset Management, run by famous value investor Joel Greenblatt. Insider sales at Cracker Barrel have largely consisted of directors and management cashing in stock options, which does not necessarily imply pessimism about the company.
Two peers that also operate chain sit-down restaurants are Darden Restaurants (DRI) and Brinker International (EAT). Darden's business is led by Olive Garden, Red Lobster, and LongHorn Steakhouse; Brinker operates Chili's and the smaller Maggiano's concept. These companies' trailing P/E ratios range from 14 to 18, and their dividend yields are similar to Cracker Barrel's as well. They too saw double-digit earnings growth in their most recent quarter compared to the previous year, suggesting that macro trends driving consumers away from sit-down restaurants may have been overblown. We recommend that investors buy at least one of these growing, value-oriented restaurant stocks. Darden Restaurants, as well as the previously mentioned McDonald's and Chipotle, are on the list of the ten most popular restaurant stocks among hedge funds.