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In May 2012, we suggested that there was 60% of upside in JACK over the long-term TAIL. Since then, the price has risen by 64%. What now?

We think the run Jack in the Box has had merits caution on the near-term duration. Over the long-term TAIL, there remains plenty of upside.

Summary

Jack in the Box has been one of our favorite longs since February 2012.  The stock has performed well since we first turned positive in February of 2012 but, while our conviction remains firm in the long-term upside in the stock price, we want to remain disciplined. With respect to many of the tenets of our long thesis (valuation, fundamentals, sentiment), we believe that the investment community consensus has caught up with reality.

We believe that the longer-term potential of the company remains underappreciated, particularly with respect to Qdoba’s future growth, and that is reflected in our Sum-of-the-Parts analysis, below. Our original SOTP analysis, published on 5/8/12, described Qdoba as the “JACK Option” and suggested 60% of upside. A significant part of what has gotten the stock higher has been a revaluing of the stock by investors. The refranchising story, along with improved same-restaurant sales performance, transpired as we expected. The outsourcing of the company’s distribution model, announced (exactly) three months after our original call for 60% upside, expedited the upward move as the market recognized the sale of non-core assets as positive for returns and margins.

Below is a refreshed SOTP analysis:

JACK: DURATION MATTERS - JACK SOTP 5.6.13

Why We Would Stay Away (For Now)

  • Valuation: The stock’s multiple has appreciated 1.5 EV/EBITDA turns since we turned bullish
  • Sentiment: Bearishness that emerged in November ’12 has evaporated
  • Qdoba: The story seems to be taking time to materialize

Why We Would Get On Board

  • Valuation: The stock remains cheap using our forward estimates
  • Sentiment: Skepticism on Qdoba remains high
  • Qdoba: Growth potential with a highly-credible mgmt team to execute on it

Charts of Note:

Valuation

We do not anchor on valuation for “buy” or “sell” signals, but it seems that the stock could be expensive here. Our earnings estimates deviate further from consensus in FY14 and FY15 than over the next twelve months. On that basis, our view of the stock is that it is fairly- or slightly-over-valued on a near-term basis and under-valued on a longer-term basis.

JACK: DURATION MATTERS - jack valuation ebitda earnings

Sentiment

As our charts, below, illustrate, the investment community’s disposition towards the stock has improved considerably over the last year-to-eighteen months. We do not see improving sentiment as an immediate-term catalyst for the stock price to move higher.

JACK: DURATION MATTERS - JACK SENTIMENT historical

 

Qdoba

We believe the most significant opportunity for JACK at this point is to prove to Wall Street that Qdoba can achieve the unit economics we are expecting as the system matures.

JACK: DURATION MATTERS - Qdoba unit econ

Quantitative Levels

Here are Hedgeye CEO Keith McCullough’s quantitative levels for JACK.

JACK: DURATION MATTERS - jack levels

Howard Penney

Managing Director

Rory Green

Senior Analyst