Join        Login             Stock Quote

Jack In The Box: A Short And Long-Term Top Idea

 November 17, 2012 02:23 PM

(By Mani) Restaurant operator Jack in the Box, Inc. (NASDAQ: JACK) appears well-positioned after disappointing results at McDonald's Corp. (NYSE: MCD), Chipotle Mexican Grill, Inc. (NYSE: CMG) and reduced buyside expectations drove short interest higher.

San Diego, California-based Jack in the Box operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. As of July 8, 2012, it had 2,247 Jack in the Box restaurants, including 1,661 franchised locations; and 614 Qdoba restaurants consisting of 310 franchised locations.

[Related -VeriFone Systems Inc (PAY): Buy This Leader In Mobile Payments On Its 55% Pullback]

Comps at McDonald's, the no. 1 player in nine of JACK's top ten markets, have been weak, but reasons are specifically related to McDonald's. Jack in the Box possesses company-specific comp catalysts in conjunction with new-found brand momentum that pave a path for above-average comp growth.

"We view weak competitor results as misunderstood noise overshadowing a unique and compelling investment opportunity," Oppenheimer analyst Brian Bittner said in a client note.

Meanwhile, distribution sale provides unexpected cash boost to a transforming free cash flow positive profile. The distribution segment's divestiture will be completed by year-end which could lift consolidated operating margins by 400 basis points (bps) and free up $60 million of cash previously tied up in working capital.

[Related -McDonald's Corporation (MCD) Q3 Earnings Preview: Just Huggin’ It]

"Margins have recently trended above expectations and our work suggests the Street continues to underestimate improving four-wall profitability," Bittner said.

The company has transitioned focus from investing in brand turnaround towards improving operational throughput and core restaurant margins. Speed of service enhancements are the number one priority, and six incremental transactions per day drive a 1 percent comp improvement. Given many units are at operating leverage "tipping points", any comp growth could be leveraged nicely.

In addition, the street expects modest Qdoba margin expansion in fiscal 2013 followed by an odd contraction in fiscal 2014.

"We see upside catalysts over the next 2+ years as higher margin franchisees' stores are purchased and margins in the low-profit store base improves. Every 100bps margin improvement at Qdoba drives EPS $0.05," the analyst noted.

Moreover, continued re-franchising is also a restaurant margin tailwind. Re-franchising activity alone has boosted consolidated restaurant margins by 70 bps, on average year-to-date. The company would re-franchise another ~125 low-margin units by year-end fiscal 2013, which makes the Street's 50bp margin expansion estimate for the company appear low.

Overall, fundamentals continue to strengthen, and the street under-appreciates Jack in the Box's earnings trajectory and accelerating store-level profits. Comp strength at the company appears sustainable owing to successful turnaround initiatives.

"New unit returns at Qdoba (15% of profits) could improve nicely and drive multiple expansion as growth focuses on recently acquired markets (from franchisees) where volumes, margins and brand awareness are above average, yet growth opportunities remain robust," Bittner wrote.

Jack in the Box is expected to report its fourth-quarter results on Nov.19. Wall Street expect earnings of 37 cents on revenue of $488.79 million, according to analysts polled by Thomson Reuters.

"We expect earnings upside in F4Q12 (on 11/19) and see the Street's F13 "operating" EPS of ~$1.50 as underestimated. "Non-core" F13 tailwinds (lower reimage incentive costs, G&A reductions, accretive Qdoba acquisitions and share buybacks) could nicely supplement "core" comp and restaurant margin improvements and drive EPS upside," Bittner added.



Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageBogle Says Indexing Destined To Win The Battle Of The Quants

Vanguard founder John Bogle gave a powerful speech last month at the Q Group’s Spring Seminar that lays out read on...

article imageVMAX and VMIN Poised to Be Most Important VIX ETP Launch in Years

REX Shares is launching two new VIX exchange-traded products on Tuesday in what is likely to be the most read on...

article imageThe April 29 Gold Triangle Breakout Update

If you’re just watching stocks, you may be missing this powerful Triangle Breakout surge in read on...

article imageSell In May, But It Is A Presidential Election Year

With May just around the corner, articles covering the "Sell in May' phenomenon are not in short supply and read on...

Popular Articles

Daily Sector Scan
Partner Center

Related Articles:

My #1 Tool For Earnings Season
More Articles on: Retail/Wholesale

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.