Stock of the Week: February 2015

Sunday, February 22, 2015

Let's Drink To This Beverage Stock

2/22/15

Just like cigarettes, alcohol is one of the only other products on the market that is about as recession proof as it gets. In bad times, people drink away their sorrows, and in good times, people drink to celebrate. So with the S&P closing at a new all-time high on Friday, it’s time to celebrate that new milestone with one of my favorite alcohol companies, Brown-Forman (BF.B). For those not familiar, Brown produces products ranging from vodka to champagne to whiskey. Among it’s products are Jack Daniels and Woodford Reserve whiskies, Finlandia vodka, El Jimador tequila, Korbel champagne and Southern Comfort.

Back in December, Brown reported 7% sales growth in Q2, up more than 100% QoQ, with US sales up 10% and international sales up 8%. While vodka and Southern Comfort saw a drop in sales in Q2, the strength of the company comes in its whiskey sales. Brown-Forman saw sales of its Jack Daniels brand rise 9% and Woodford Reserve and Old Forester brands grew by more than 10%. That’s where I believe the real value in the stock is. Management has cited its strong brand presence and lower gas prices as reasons for reaffirming its FY15 outlook for 6-8% net sales growth in whiskey. The company recently released extensions of its Jack Daniels brands, called Tennessee Fire and Tennessee Honey, which puts them right in the thick of the hottest growing whiskey flavors, with it’s honey flavors growing 36% over the last year.

The American whiskey boom is expected to grow at astronomical rates into the future. So far in 2015, the Distilled Spirits Counsel of the US said, “in volume, total spirits cases sold were up 3.9M, and whiskey’s 3.1M case increase was 80% of that growth. Flavored whiskey sales are growing even stronger, with 1.4M additional cases sold, accounting for 45% of total whiskey sales.

Now, Brown-Forman is not cheap. The stock trades at 29x FY15 earnings and 26x next year’s earnings. That’s expensive when you compare it to Constellation Brands, which is trading at only 23x FY16 earnings and the S&P, which is trading at right around 16x next year’s earnings. But based on the growth in whiskey sales, I think the company has a bright future ahead of them. Brown-Forman is set to report Q3 earnings on March 4, but I like the stock right where it is at $92.58, above the 50 and 200 day moving averages of $89.68 and $90.95, respectively. Looking forward, I see Brown-Forman hitting $105 by years end, representing a 13% gain, which based on most analysts estimates, would double the gain in the S&P over the same time frame.

If you’re looking for some alcohol and you don’t like drinking…or even if you do like drinking, invest in the Jack Daniels brand. Invest in Brown-Forman.

Last week, I sold out of my position in FireEye as the stock rallied 28% in the two weeks that I’ve owned it. While I think the stock goes much higher from here, I would look to buy it back around $42. I also reduced my position in Macy’s as part of rebalancing my portfolio. The company reports earnings this week and still firmly believe in the long-term story.

My current positions: Long Ford (F), Gilead Sciences (GILD), Starbucks (SBUX), Macy’s (M), Google (GOOGL), Facebook (FB), Delta Airlines (DAL), Whole Foods (WFM), Wells Fargo (WFC), General Motors (GM), ConocoPhillips (COP), Kinder Morgan (KMI), Time Warner (TWX), Palo Alto Networks (PANW), Twitter (TWTR), NXP Semiconductors (NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), Masco (MAS), United Rentals (URI) and Regeneron (REGN).

Jeff Lewison

Sunday, February 15, 2015

Move Over Chipotle

2/15/15

Over the last few years, when it comes to food service stocks, Chipotle has often been seen as being the darling of the group. However, there’s one stock that has outperformed the burrito king by more than 200% over the last three years; Jack in the Box (JACK). In fact, over the last year, there isn’t a single competitor that has outperformed Jack, or has even come close to the stock performance. For those who aren’t very familiar with the company, Jack in the Box operates and franchises over 2,200 Jack in the Box restaurants, as well as 600 of Chipotle’s burrito competitor, Qdoba restaurants. While many people think that McDonalds and Yum Brands are performing poorly because consumers are done with unhealthy food options, Jack is defying that logic and proving you don’t need a farm-to-table concept to be successful.

Back in November, Jack reported another outstanding full year, having grown EPS by more than 30% YoY for the third straight year. One of the biggest reasons for Jack’s strong performance is because a few years ago, management changed its business model, moving towards one where a large majority of it’s restaurants would be franchised, leaving most of the costs to the franchisees and allowing Jack to sit back and collect a steady annuity stream. As of November, 81% of all Jack in the Box & Qdoba restaurants were franchised, and they expect to add another 20 to the list over the next 3 months. By franchising most of its restaurants, Jack has been able to consistently increase operating margins, ending 2014 with combined margins of 18.4%.

While McDonalds is seeing slowing and negative same store sales growth, Jack is enjoying the opposite. For the year, Qdoba same store sales increased 5.7% (up about 14% when you include stores open less than 13 months) and has increased same store sales by more than 7% in the last three quarters. For Jack in the Box restaurants, same store sales grew 2% YoY, and while that may not sound so hot, it outpaced the industry average in each of the last four quarters. Jack isn’t planning on slowing its growth any time soon. The company is still growing, having opened up 38 new Qdoba and 12 new Jack in the Box restaurants in 2014, and they plan to open 10-15 new Jack restaurants and 50-60 Qdobas.

As I previously mentioned, unlike some of its competitors, Jack in the Box has a great management team, and knows what the consumer wants and how maintain strong sales. Although commodity costs rose last year, the company was able to maintain pricing power, leading to increased margins and solid same store sales. For 2015, Jack is forecasting the cost of beef to rise between 4-5%, but have already locked in other commodity costs like chicken, cheese, and bread for the next year. Management expects about a 2% and 7% increase in Jack in the Box and Qdoba same store sales. Additionally, despite rising commodity costs and higher wages in California, operating margins are still expected to grow by 50-90 basis points, and due to the restructuring of its business model, 2015 earnings are expected to grow by about 15%.

The wild card in this whole story is if Jack in the Box finally decides to spin off its Qdoba restaurants, ala what McDonalds did with Chipotle. But the longer Jack waits, the higher the premium for Qdoba becomes for Jack’s stock price. In the meantime, Qdoba restaurants are generating strong sales growth and solid margins that Jack should be in no hurry to make the move. Jack is trading at 27x forward earnings, which is below the industry average, and the company continues to buy back stock and offers a dividend just below 1%.

Jack in the Box closed at $87.12 on Friday, after hitting a new all-time high of $88.55 on Thursday, they report Q1 earnings after the bell on Tuesday so you don’t have to rush out and buy it when markets re-open this week. Instead, wait to see what the quarter looks like and hope the stock sells off. JACK hasn’t traded below it’s 50 day moving average since it blew out Q3 earnings last August, so I would look to be a buyer against $82 which is the current 50 day moving average. Even if the stock sells off, I expect that to be a short-term blip, in a long-term bull market, as I have a price target of $102, representing a 17% gain from Friday’s close. So remember…if you want better burritos, go to Chipotle; but if you want better stock performance, go to Jack in the Box.

Jeff Lewison

Sunday, February 8, 2015

Watch This Resistance Level

2/8/15

Although oil has rallied 20% in the last two weeks, and with hiring on the rise, it is no surprise that the S&P is rallying back from the January sell-off to within just 1.8% of all-time highs. However, I am not ready to say that we’re in the clear and are headed for new all-time highs. A key resistance level in the S&P since the year began is 2065, and although the market traded through that level Friday, on the heels of a strong jobs number, equities were unable to hold that level and closed down 7 points at 2055. Friday was the fourth time this year, the S&P attempted to close above that key 2065 level, and is now the fourth time it failed, each time leading to a sell off of at least 75 points. I don’t see this time being any different. Most of the big earnings reports are already behind us, the US dollar continues to rise against most foreign currencies, which is hurting profits, oil volatility remains elevated and most of the economic data out of the US has been mediocre. I also anticipate oil prices pulling back again, the dollar continuing to rise and interest rates heading lower. Until the S&P climbs above 2065, and holds that level, I foresee the markets to continue to trade sideways.

One sector that has been hit hard in the last couple weeks is one area of opportunity in this sideways market. With oil’s recent rally, airline stocks have been in sell off mode, but I think it’s actually time to be buying these airlines, not sell them. In the last two weeks Delta is down 11%, Southwest Airlines dropped 6.4%, American Airlines sank 14.3% and United Airlines lost 10%. While I believe oil has bottomed (and oil stocks have for sure bottomed so start looking at those), I fully anticipate that it will push back down towards $45, which will only move the airlines higher. Each airline stock that I mentioned hit new all-time highs two weeks ago, and now find themselves in correction territory. While over the long haul, airlines are heavily levered to oil prices, short-term rallies in oil should not push you to sell, but should give you a chance to buy. Some common themes from all of the earnings conference calls are that ticket prices are not going to get cheaper just because oil is lower, and capacity will remain stable. If you remember back when the airlines needed a bailout, they all increased capacity levels on the back of lower oil prices, and as soon as oil went higher, people stopped flying and profits sank. This time around, airlines are better run and are not taking any chances. For instance, Delta announced that they will be using excess cash to pay down debt and pay back shareholders. If you have been waiting to get into some of these airline stocks, now is a great time to do so, so have the trigger ready.

Earnings continue next week with Masco reporting on Monday. So far, markets have gotten mixed results from the housing industry, but we should get more clarification once Masco reports. The company is the ultimate housing play, being involved in everything from cabinets to paint to insulation, so they are tied to new and existing housing performance. Masco does have European exposure where the stronger dollar could impact earnings, but I expect good results from them and would be a buyer on a breakout above $26.50. On Tuesday, biotech giant, Regeneron reports and while I like the name long-term, I would not recommend buying before they report. Last week Gilead reported huge numbers and initiated a dividend and buyback, however the stock tanked 9% after announcing that discounts for their best-selling drugs may be steeper than anticipated. Other biotechs like Celgene and Amgen both reported strong quarters but are also trading below where they were before reporting earnings. Last time Regeneron reported, the stock fell sharply, only to rally back a few days later. If Regeneron drops on earnings again this quarter, I would highly recommend you add them to your portfolio.

A number of headwinds remain in the market. The US dollar continues to climb against most other currencies and some of the recent US economic data have not been as strong as expected. Furthermore, stories continue to come out of Europe about Greece looking to exit the Eurozone, which still sends US equities lower (the S&P dropped 13 points in the matter of minutes on Wednesday before the close). Most investors have a sell first, ask later mentality, so use that to your advantage. Once investors realized that what is happening with Greece really doesn’t matter, stocks rallied back up as if nothing ever happened.

Jeff Lewison