Cracker Barrel has been on fire lately. In the past six months alone, the company’s stock price has rocketed 52.4%, reaching $59.98 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy Cracker Barrel, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Despite the momentum, we don't have much confidence in Cracker Barrel. Here are three reasons why you should be careful with CBRL and a stock we'd rather own.
Why Do We Think Cracker Barrel Will Underperform?
Known for its country-themed food and merchandise, Cracker Barrel (NASDAQ:CBRL) is a beloved American restaurant and retail chain that celebrates the warmth and charm of Southern hospitality.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Cracker Barrel’s 2.5% annualized revenue growth over the last five years was weak. This was below our standards. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Cracker Barrel, its EPS declined by 17.7% annually over the last five years while its revenue grew by 2.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Cracker Barrel’s $1.15 billion of debt exceeds the $12.04 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $211.6 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Cracker Barrel could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Cracker Barrel can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Cracker Barrel doesn’t pass our quality test. Following the recent surge, the stock trades at 20.4× forward price-to-earnings (or $59.98 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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