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.
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), Regeneron (REGN), FireEye
(FEYE) and long FEYE calls.
Jeff Lewison
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