Leading The Pack On JACK

HEDGEYE ANALYST:

Howard Penney, Managing Director of Restaurants (@HedgeyeHWP)

In early May, we put out a note indicating that the time was right to get bullish on Jack in the Box (JACK). We went contrarian to the Street consensus that current sales trends would not strengthen quarter-over-quarter. Jack’s core business along with its fast growing Qdoba brand is something we found attractive at the time and still do. The company will soon wrap up its remodeling and rebranding phase which will relieve pressure on capital expenditures. This, combined with better comps going forward bodes well for top line growth. Over our long-term TAIL duration, we see as much as 50% upside in the stock.

Leading The Pack On JACK - JACK packonbull

Here is our original thesis from May 5th highlighting our durations for JACK:

TRADE (Duration = 3 weeks or less)

2QFY12 earnings are expected to be released on the 15th of May. Our view is that the Street is overly bearish on the company’s top-line trends, currently expecting a slowdown in two-year average trends.  We believe that the current sales trends at Jack in the Box strengthened quarter-over-quarter.

TREND (Duration = 3 months or more)

With the benefits of the remodel program only impacting the company’s financials now and the costs (capex) fading, we are positive on the company’s cash generation prospects.  Easier comps going forward should also help bring the top line higher.

TAIL (Duration = 3 years or less)

JACK trades at a discount to SONC (7.3x EV/EBITDA) and WEN (8.2x). We believe that JACK should trade at a premium to SONC and in line with WEN.  Over the next three years, we see as much as $8 in upside to JACK. 

So when we got bullish on May 5, 2012, the stock was trading at $23 a share. As of yesterday, the stock was at $27. That’s something to get excited about. The Street (Old Wall) is now following our lead and getting bullish as well. This company’s got legs and plenty of room (and time) to grow.