At $153.96, Is It Time To Buy Cracker Barrel Old Country Store Inc (CBRL)?
Cracker Barrel Old Country Store Inc (NASDAQ:CBRL) is currently trading at a trailing P/E of 18.3x, which is lower than the industry average of 25.4x. While CBRL might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Cracker Barrel Old Country Store
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for CBRL
Price-Earnings Ratio = Price per share ÷ Earnings per share
CBRL Price-Earnings Ratio = 153.96 ÷ 8.401 = 18.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CBRL, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 18.3x, CBRL’s P/E is lower than its industry peers (25.4x). This implies that investors are undervaluing each dollar of CBRL’s earnings. Therefore, according to this analysis, CBRL is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy CBRL, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to CBRL, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with CBRL, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing CBRL to are fairly valued by the market. If this is violated, CBRL's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of CBRL to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If you are considering investing in CBRL, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Cracker Barrel Old Country Store for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
