Thursday, November 15, 2012

Jack in the Box: Tasty Bargain Served By The Market

Jack in the Box (JBX)
Jack in the Box is a fast food company that has been around since the early 50s. They offer a variety of hamburgers,salads,tacos and desserts. The majority of Jack in the Box's locations are in California representing 900 out of the 2,100 that they operate according to their website. They are in 17 states including Hawaii. There is a reason I am bringing this up. Look at how many more stores they can open and markets they haven't even stepped foot in! Some of their competitors like McDonald's are basically saturated.

Keeping Things Simple
It is nice to see an annual report that doesn't try to spin everything to make the companies prospects look as amazing as possible. In the annual report on the fifth page they show diluted eps growth instead of eps growth. They are not trying to sugar-coat anything. The report is a little flashy and colorful but I can forgive them for this. I almost forgot one of the best parts of Jack in the Box, Qdoba Mexican grill. This is a quick serve type restaurant where you can customize your burritos and tacos before sitting down to dine or carry it out. Qdoba has higher prices but the quality is great. Jack in the Box has a value menu as well and relatively inexpensive items to appeal to a wide spectrum of fast-food customers.

Future Outlook
People get hungry 3 times a day so they should have a long-term ability to stay in business. The industry is very competitive but Jack in the Box satisfies its customers with a value priced variety of offerings. Both of their restaurants serve Mexican-American foods which I see as a good thing as the country slowly blends Hispanic food into its culture. The Hispanic population in the U.S. is growing enormously. The food in the future of the U.S. will be a blend of the new and old culture, just look at the history of other countries.

Same store sales growth is the most important measure because its easy to just open new stores for revenue growth without growing the existing stores. Both have growing same store sales. Most recently, the company expects a 5.5 percent to 6 percent same-store sales rise at Jack in the Box outlets and a 3 percent to 5 percent same-store sales rise at Qdoba restaurants. They have also increased their guidance for fiscal 07' to between $3.62 and $3.66 per share.

Jack in the Box
market cap 1.93 billion*
return on equity 23%
total debt to equity .86
forward PE 15*

*low numbers.

Valuation vs Peers

Burger king
market cap 3.48 billion
return on equity 23%
total debt to equity 1.32
forward PE 17


market cap 66 billion
return on equity 10%
total debt to equity .52
forward PE 18

Yum Brands
market cap 16.9 billion
return on equity 60%
total debt to equity 1.64
forward PE 17

This kind of relative valuation to its peers with earnings multiples is only a piece of the pie in considering a company for investing. As an example of its limits as the sole method of valuation, look at the valuations of the tech companies like Cisco CSCO and Lucent ALU just before the market crash in 2000. To pick the most "undervalued" of those based on price to earnings would have been disastrous. CSCO after sporting a PE ratio of over 140 in 2000 lost over 70% of its value. Some professionals will use this peer comparison as the meat of their analysis. That analysis is incomplete. The company must be compared of course to its competitors but to much emphasis on relative valuation is dangerous.

Opportunity Cost
The risk free long-term government bond yield is 4.75%. At a an inverse PE of 15 Jack in the Box has an earnings yield of 6% right now and very conservative growth of at least 9% per year. Flip the PE and you get a more meaningful ratio.

Bottom Line
They can grow earnings just 10% a year buy entering those new markets for 5 years. As they do this they should have eps of at least $5.77 in 2012 assuming this growth. If then the stock trades at just a PE multiple of 15 then there is a 48% return or an 8% compounded annual return on an investment at $58 a share. If the market is feeling a little more ecstatic a multiple of 20 could easily be attained then the return is 98% and the yearly compounded return is 14%. Jack in the Box is a buy below $58 a share.

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full disclosure: no position in JBX

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