The Iranian Threat to Cracker Barrel

05/25/2012 11:32 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Immigrant entrepreneur Sardar Biglari is stalking the roadside restaurant chain, whose stock is both cheaper and hotter than the Golden Arches, writes senior editor Igor Greenwald.

Jim Jubak recommended McDonald’s (MCD) shares the other day, after finding its fast-food competitors’ margins less than filling. And I wouldn’t dare second-guess Jim, since he’s forgotten more about stocks than I’ll ever glean.

The global fast-food leader’s 3.1% annual dividend yield certainly looks tasty, especially now that it’s 75% above the yield on the ten-year Treasury note. But ask me “Can Anyone Beat the Big Mac,” and I’ll point you to the shares of Cracker Barrel (CBRL).

What does the roadside country cooking chain offer that the Golden Arches lack, besides meatloaf and grits? Try the following value menu:

  • CBRL is 16% cheaper than MCD based on its price-to-earnings multiple, and 24% judging by last year’s cash flow
  • It faces much easier comparisons after years of stagnation, years MacDonald’s spent feverishly improving and growing
  • Cracker Barrel has no exposure to the economic turmoil overseas, and much higher sensitivity to US gas prices, which have just helpfully slid ahead of the peak summer driving season
  • A much healthier chart, with CBRL shares closing Thursday at an all-time high while MCD languishes below its 50-day and 200-day moving averages
  • And, last but not least, CBRL has a big activist shareholder pressuring the company to improve its lackluster long-term results by buying the stock and waging a proxy fight

The last one is key, both for my interest in the stock and prospects for unlocking more shareholder value.

Cracker Barrel was founded in 1969 in Lebanon—that’s Lebanon, Tennessee—by a good ole boy somewhat resembling the mustachioed figure on its logo. It grew into today’s chain of 615 stores across 42 states by peddling nostalgia for the bygone America of country stores alongside buttery homestyle dishes.

Along the way, the founder, who died earlier this year, briefly demanded the firing of all employees suspected of being gay, because he thought they were making rural customers uncomfortable. Some years later, black customers sued, claiming they were made to feel unwelcome.

Cracker Barrel settled the suits, and now explicitly bars discrimination on the basis of sexual orientation. Still, the format celebrates places and a time that weren’t exactly models of diversity.

Sardar Biglari was born in Tehran—the one in Iran, not Illinois—eight years after the first Cracker Barrel opened its doors. When he was seven and Iran’s Islamic revolution five, his family of royalist rug merchants escaped to San Antonio.

The 34-year-old entrepreneur models himself after idol Warren Buffett, though he has a racier appetite for expensive sports cars. He’s already turned around a couple of restaurant chains—Steak ’n’ Shake and Western Sizzlin’—that now operate as subsidiaries of his Biglari Holdings (BH).

But Cracker Barrel won’t even give Biglari a seat on the board, though he’s its largest shareholder with a stake of more than 17%. Instead, for the second year in a row Cracker Barrel is asking shareholders to approve a poison pill discouraging Biglari from accumulating more than 20% of the shares.

So while Cracker Barrel’s executive chairman grew up in England and its new CEO is a woman, this is very much the good ole boys and girls versus a pushy immigrant outsider. Its old America versus new, the country store versus the rug merchant turned value investor.

Biglari has kept on buying Cracker Barrel in the market right on into May, while pledging to stick it out for the long haul and even promising to give advance notice before selling a single share.

Cracker Barrel hasn’t been receptive to his criticisms about stunted profitability, overpriced billboards, and the expense of employee bathrooms. But it scurried to freshen up its board a bit and promoted a CEO from within when Biglari first came calling.

Quarterly results announced this week beat expectations, with price hikes accounting for much of the 3.3% comp sales increase but customer traffic also up, for the second quarter in a row.

The company is buying back its shares alongside Biglari. The latter doesn’t have an obvious path to seize control unless performance disappoints once more and other shareholders help him stage a coup. But every share he buys gives incumbent management another reason not to get complacent.

Of course, Cracker Barrel doesn’t have McDonald’s margins, brand, or global reach. But it does pay a 2.8% dividend just for waiting to see whether Biglari can snatch any of the four board seats he is contesting.

He is one very hungry young man who’s working hard to turn up the heat. Good ole Cracker Barrel had best keep cooking.

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