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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.





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:





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:




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





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.







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.





Howard Penney

Managing Director


Rory Green

Senior Analyst


Are Chinese Banks Making Up Numbers?

Recent reports suggest that the People's Bank of China (PBOC) may lift the upper limit of the floating range for deposit interest rates to 1.2 times the benchmark rates. While it’s tough to discern whether or not the Shanghai Composite Index was up on this today, as the rumors have apparently been circulating, it’s interesting to see the PBOC continue with its financial system reform agenda. Recall that a full liberalization of deposit rates is something that would materially erode the asset quality and the Net Interest Margin/profitability of the Chinese banking system. Roughly 25% of the Big 5 banks’ portfolios are in bonds that are marked-to-model yielding at or below the benchmark one year deposit rate.


Are Chinese Banks Making Up Numbers? - CHINACHART


While a move from 110% to 120% of the benchmark isn’t necessarily a game changer, it does raise serious questions about what Chinese banks plan to do when D-Day finally comes. Another major recapitalization of the banks, which would be the third time in the last 10 years, is not out of the question. The prospect of major secondary issuance could potentially hang over the Shanghai Composite Index for the foreseeable future, creating a headwind for the Chinese stock market.


While five days of data is not enough from which to draw many conclusions, the May holiday is off to a strong start.  Average table revenues for 5 days spanning April 30-May 4th were HK$1.2 billion, up 24% YoY (HK$975 million) and up 36% from last week’s HK$886 million.  In-line with our earlier projections, we expect May GGR growth to accelerate to 16-20% or HK$29.5-30.5 billion.


In terms of market share, Galaxy and Wynn were big gainers.  Galaxy’s share shot up to 21.1% from 17.8% share in April while Wynn’s share rebounded to 12% from the April low of 9.2%.  MPEL gave back its massive share gains in April and dropped back to its 6M average share of 14.0%. 





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