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How Does Cracker Barrel Old Country Store's (NASDAQ:CBRL) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

To the annoyance of some shareholders, Cracker Barrel Old Country Store (NASDAQ:CBRL) shares are down a considerable 42% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 43% drop over twelve months.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Cracker Barrel Old Country Store

Does Cracker Barrel Old Country Store Have A Relatively High Or Low P/E For Its Industry?

Cracker Barrel Old Country Store's P/E of 10.09 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (12.7) for companies in the hospitality industry is higher than Cracker Barrel Old Country Store's P/E.

NasdaqGS:CBRL Price Estimation Relative to Market March 26th 2020

Cracker Barrel Old Country Store's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Cracker Barrel Old Country Store, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Cracker Barrel Old Country Store's earnings per share were pretty steady over the last year. But it has grown its earnings per share by 7.9% per year over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Cracker Barrel Old Country Store's Debt Impact Its P/E Ratio?

Cracker Barrel Old Country Store has net debt worth 18% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On Cracker Barrel Old Country Store's P/E Ratio

Cracker Barrel Old Country Store trades on a P/E ratio of 10.1, which is below the US market average of 12.6. EPS grew over the last twelve months, and debt levels are quite reasonable. If you believe growth will continue - or even increase - then the low P/E may signify opportunity. Given Cracker Barrel Old Country Store's P/E ratio has declined from 17.5 to 10.1 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Cracker Barrel Old Country Store. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.