A Low-Risk Cracker Barrel [CBRL Group] Options Play

CBRL Group (CBRL) June 6, 2008 1:35 PM price: $28.32
52-week range: $24.00 (Jan. 22, 2008) - $46.30 (Jun. 15, 2007)
Dividend = $0.18 quarterly = 2.55% current yield.

CBRL operates 576 Cracker Barrel Old Country Store restaurants/gift shops in 41 states. Sites are mainly located near major highways and tourist areas. Prepared food represented 78.4% and retail sales were 21.6% of FY 2007 revenues. CBRL also owns and operates 143 company owned and 26 franchised Logan's Roadhouse restaurants.

These shares have been quite volatile this year as the weak economy and high gas prices have dampened investor enthusiasm for casual dining stocks. The valuation is absolutely compelling, though. Here's the story…

CBRL is on a fiscal year ending in July. Each FY since 2000 has shown improved EPS and the dividend has been increased significantly since 2003. Both are due to finish FY 2008 [ends July 31] at all-time record levels despite all the macro-economic headwinds.

The per-share data since 2001 as reported by Value Line:

FY 2008 includes estimates for Q4.

 

FY ........ Sales …..Cash Flow……...EPS ……Dividend ...Outstanding Sh…..Avg. P/E

2008 …$110.00…..$5.70 ………$3.03 …….$0.72 ……..22.00 MM …….. 13.9x

2007 ….$99.35 ….. $5.61 ………$2.52 …….$0.56 ….…23.67 MM …….. 17.2x

2006 ….$85.46 ….. $6.10 ………$2.50 …….$0.52 …….30.93 MM …….. 15.3x

2005 ….$55.07 ….. $4.16 ………$2.45 …….$0.48 …….46.62 MM …….. 15.9x

2004 .…$48.82 ….. $3.70 ………$2.31 …….$0.44 …….48.77 MM …….. 15.9x

2003 .…$45.92 ….. $3.57 ………$2.09 …….$0.02 …….47.87 MM …….. 14.0x

2002 .…$41.11 ….. $3.07 ………$1.64 …….$0.02 …….50.27 MM …….. 16.6x

2001 .…$35.69 ….. $2.52 ………$1.30 …….$0.02 …….55.03 MM ……...13.5x

 

The company has been buying in their own shares by the bucketful. The large drop in share count in FY 2006 came via a Dutch tender. Other years' share count drops are from an ongoing share repurchase authorization. This is a 'slow motion LBO' that is allowing existing shareholders to benefit instead of just the private equity guys.

Over the past seven years EPS surged from $1.30 to $3.03 and the dividend grew from $0.02 to $0.72 annually. Corporate revenues have nearly tripled and cash flow has more than doubled on a per share basis.

CBRL shares right now trade well below the low prices from the whole period 2004 – 2007 when the price never got below $30 for even one day.

When CBRL was out-of-favor in 2001 it bottomed at 13x earnings. Buyers then saw their shares jump from $15.70 to $42.10 over about 26 months. CBRL hit a low of $30.00 in early 2004 with FY EPS of $2.31. From the P/E of 13 at that time the shares moved to $47.90 in under two years for a gain of > 60% (including yield).

CBRL shares are even cheaper now then they were at the lows in 2001 or 2004.

Value Line's 3 – 5 year target price is listed at $50 - $70 even assuming a much lower than typical 12 multiple. They give CBRL shares a 95th percentile ranking for earnings predictability as well.

At the current quote of $28.32 these shares trade for < 9.4 times current FY earnings and just 8.6x the consensus FY 2009 estimate of $3.31/share. CBRL's 10-year median P/E has been 16x. Even 14 times year ahead projections would lead me to a target price of $46.34 or up 63% plus dividends.

Is $46+ a crazy goal? Nah. CBRL shares actually touched high share prices of $42.10, $43.10, $44.60, $47.90 and $50.70 in calendar years 2003-2007 respectively- all years when the fundamentals were not as good as they are today.

 

Here's my low-risk option play for those of you who like to make exceptional returns even on shares that don't do much.

 

………………………………………………cash outlay ………….cash inflow

Buy 1000 CBRL @ $28.32 ………………….$28,320

Sell 10 CBRL Jan. $30 Calls @ $3.40 ………………………………$3,400

Sell 10 CBRL Jan. $30 Puts @ $5.00 ……………………………….$5,000

Net Cash Outlay ……………………………..$19,920

 

If CBRL shares move up to $30 by January 19, 2009 (a gain of just 6% from the current quote):

Your shares will be called (sold) for $30 /share = $30,000.

Your puts will expire worthless (good for you as a seller).

You will own no shares and no options.

You will have received at least two dividends totaling $360.

Your cash balance between the stock sale and the yield will give you $30,360 for your original cash outlay of $19,920.

That's a $10,440 gain or 52.4% cash-on-cash if CBRL finishes above $30 on expiration day next January.

Risk? Break-even is figured as follows:

 

• On the shares you own it's $28.32 less the $3.40 call premium = 24.92 /share.
• On the puts it's the $30 strike price less the put premium of $5 = $25.00 /share.
• Overall you're in profit if CBRL shares stay above $24.96 through expiration date.

Worst case is that you'll end up owning 2000 shares of a fine stock at a price below the lows of 5 of the past 6 years. At your break-even CBRL would be selling for at < 8 times FY 2009 projections and with a 2.88% yield.

Disclosure: Author owns CBRL shares and is short CBRL options.

Comments

[advic:]

How do I end up with 2000 shares of CBRL ? Please explain, Thanks

2008 Jun 08 10:09 AM

[dublintim:]

CBRL sold Logan's to Black Canyon Capitol and another investor of December '06. Not sure why they were listed as an asset????

2008 Jun 08 12:39 PM

[jackh:]

Went there for a meal.

Indifferent staff serving food cold from the kitchen cooked by staff who think that a chef is a guy who flips burgers without using a timer. (flip when it beeps)....

A lot of old timers who can't be bothered to cook seems to be the customer base.

I guess this means that as boomers age the clientel will grow and IHOP Denny's and the like will also prosper.

I think I will watch for a bottom...... perhaps when I see how the consumer is doing in the next 4 to 6 months.

Meanwhile... I"ll eat elsewhere......

2008 Jun 08 03:45 PM

[jackh:]

In my totally unscientific opinion I look to buy around $20 sell around $40...... it's now on my wish list.

2008 Jun 08 03:54 PM

[Matt Schuering:]

You end up with 2000 shares because 1) you will own 1000 shares outright if you follow this trading strategy, and 2) if the stock closes below $30 on the expiration day of the put options you sold, and you have not closed out that put position, then the put options purchaser will "put" the stock to you at $30, he/sh will be short at $30. You are then obligated to buy CBRL at $30. Each option contract is for 100 shares of stock, so 10 options contracts * 100 = 1000 shares of stock. You do get to keep the premium you sold the options at.

2008 Jun 08 05:53 PM

[anastos:]

You end up with 2000 shares when you click on "buy now" at E*trade.

2008 Jun 08 10:13 PM

[Chungst:]

It's a scam -- the writer wants you to use leverage (i.e a margin account for the option trades) and then uses "cash on cash" returns (I advised the writer many times before). It's basic smoke and mirrors designed to fool people.

Also, the writer doesn't have a clue to the intrinsic value of CBRL and then makes this dubious claim the worst case of "is that you'll end up owning 2000 shares of a fine stock at a price below the lows of 5 of the past 6 years." That is clearly not the worst case scenario.

If you read his other articles involving options, it's practically the same format -- long a stock, sell a covered call and sell a put.

2008 Jun 09 10:14 AM

[Paul Price:]

The returns are exactly as described.

Read the posting and decide for yourself.

2008 Jun 09 10:43 AM

[Chungst:]

It is a scam because the returns are misleading and that's why I pointed it out.

The original post stated: "That's a $10,440 gain or 52.4% cash-on-cash if CBRL finishes above $30 on expiration day next January" without disclosing the use of leverage. This is not how one would calculate return under GIPS.

Mr. Price himself admitted to his own mistake in his earlier piece on Microstrategy when he wrote:

"You do need a 'margin type' account and paid-up marginable equity to do these trades. You do not need to lay out any cash other than your net purchase price less the option premimums received. "

"If you make $635 on the expired option in your example by writing a put against stock you are already holding it is, indeed, a return on a negative cost of capital.

If you want to calculate the return on your theoretical margin requirement of 20% of your net committment of $6315 then the return on that would be $655/$1263 or 51.86% for the eight months until expiration [assuming the shares stay above $70]."

source: seekingalpha.com/artic...

Clearly, Mr. Price is trying to fool people again. If he agreed to the use of margin to put on the options trades, then he agreed cash on cash returns was misleading. He can't have it both ways (personally, he is the one who is cluesless regarding his hypocrisy).

2008 Jun 09 04:34 PM

[Chungst:]

Separately, I challenge Mr. Price to submit a discounted cash flow analysis to determine intrinsic value to CBRL and supply the necessary inputs so the work can be replicated.

Since Mr. Price claims I am "clueless," then he MUST know the intrinsic value because he has an idea as to the worst case scenario.

2008 Jun 09 04:38 PM

[Paul Price:]

'Cash-on-cash' is self explanatory.

Use of a 'margin type' account has absolutely nothing to do with taking any cash out of your pocket if you write puts against paid up equity that's already in your account.

2008 Jun 09 11:04 PM

[Chungst:]

I can only speak facts. It is a SCAM because a person with "original cash outlay of $19,920" CANNOT generate the "$10,440 gain" WITHOUT a margin account and WITHOUT using leverage.

I challenge Mr. Price to open a new brokerage account with about $20,000 (to help cover commissions) and try to execute these trades without a margin account and without using leverage (i.e. cash collateralizing the options).

It is simple deception to claim cash on cash returns when failing to disclosed the amount of leverage being used.

2008 Jun 10 07:12 AM

[Paul Price:]

I do these trades virtually every day, exactly as I described.

You are flat out wrong.

2008 Jun 10 07:59 AM

[Chungst:]

Mr. Price:

You already contradicted yourself based on your comments here and your comments on MicroStrategy Inc. (source: seekingalpha.com/artic...)

You do these trades every day because you use leverage. Someone who doesn't want to use leverage, i.e. using cash collateralized puts, must provide more capital.

Third, take the challenge and perform the trade WITHOUT leverage.

The facts speak for themselves.

2008 Jun 10 08:32 PM

[cbrl lover:]

I am sorry that jackh had a poor Cracker Barrel experience. I am affiliated with the company and assure you our goal is to please all of our guests! With 562 stores nationwide, open 363 1/2 days per year i have no doubt a bad dining experience slips through. On behalf of CBRL, I apologize and hope that you will try us again. If in the future you have a poor experience, ask to see the manager immediately and let them know. Believe it or not, we are one of the few companies left that truly care about our customer. Best Wishes!

2008 Jun 26 10:36 PM