Jack in the Box, Inc. (NASDAQ:JACK)

1 word, Qdoba , tho the name of the company is Jack in The Box, the winner for this company is the next Chipotle ???
Qdoba is awesome food with a great following ..

Same stores sales are dropping and will take the stock with them.

Qdoba is the main driver of growth for JACK, and if CMG is any indication, there's alot of opportunity out there for "fresh" Mexican cuisine.

JACK is similar to CMG in that they both serve fast casual Mexican food but is much less profitable on a per unit basis.
Most investors would shy away from the company given the profit disparity but if you examine the items that make Qdoba less profitable, I would argue that the company has room for improvement. Examining the cost disparities further, the main difference in unit costs stem from differences in labor and occupancy costs.

Click below for my full post on the Motley Fool Blogging Network
http://bit.ly/HgctGR

I like JACK's ongoing efforts to franchise its company-owned stores. The move should significantly increase JACK's margins going forward.

Furthermore, the company has an undervalued asset in its Qdoba brand, which one hedge fund on Sum Zero estimated would be worth $20/share all by itself. A spin-off, which the company has thus far resisted, could be the catalyst that unlocks this value.

Deej

If their stake in Qdoba was valued the same as Chipotle, it would be worth more than the market cap of the entire company.

They own Qdoba which I like much better than Chipotle (food/taste wise). They are investing more in new Qdobas, and have a lot of market to expand into with both stores.

No burger worth mentioning. How hard is it to market a burger? McDonalds has burgers to spare; big Mac , quarter pounder, filet-o-fish for Fridays, Wendy's has the square patty thing. In and Out has the double-double, carl's has the $5 dollar burger and the famous star. But Jack can't seem to pull a burger out of their box!

will new stores opening in china and expanding in india I see this being a good choice

Qdoba

This reminds me a lot of Wendy's 24 months or so ago... the company is in a period of transition-- as it aggressively converts its company-owned stores into franchises. This should make a more predictable revenue stream and result in a higher multiple. Furthermore, (and what I really like) is the Qdoba operation. I think it is inevitable that it is eventually spun-off and allowed to succeed on its own. Think Chipotle and Mcdonalds, Wendy's/Arby's. I've seen this before and I like this. It's trading at 9X EV/EBITDA (with admittedly a lot of capex spending right now), so it's not super cheap. If it falls a bit.. and I was able to buy it around 6-7X EV/EBITDA, I'd probably pull the trigger in real life.

mmm...Qdoba

ack represents an opportunity to buy into a business at 7.5x CF which is undergoing a refranchising program where they are continuing to sell CF(even at these depressed levels) at an effective multiple of 12x. In addition the CF they are receiving in place is a more stable, royalty based CF which traditionally earns a much higher multiple.

Investment Thesis:

Attractive Valuation
-7.5x EBITDA less Capex represents a discount to 5-year Jack trading multiple made even more compelling given the increasing contribution from Qdoba and now nearly 50/50 franchised/owned mix at Jack in the Box concept

-Franchisors well positioned in an inflationary environment and likely to be outsized beneficiaries (if Joe the Plumber starts paying $6 for a value meal vs $5, the 5% is fixed)

-Refranchising economics even at bottom levels still very accretive (12x effective cash flow multiple on sale) and provides for a natural catalyst

-Significant potential for Geographic Expansion of Jack and Qdoba Concepts
--69% of Jack units are in California and Texas and the brand is only represented 17 states
--Even in depressed markets, new units yielding ~20%+ cash on cash run-rate returns

-Qdoba while definitely not Chipotle still has significant room to run and has increasinginly become a larger contributor. The business has separate headquarters and is readily separable at an accretive multiple

-CKE buyout is positive news but likely priced in and a low probabilty event. Jack and Qdoba are definitely stronger concepts than Carl's Jr/Hardees and also likely better positioned for the environment. Also as JACK shifts to the franchise heavy mix it becomes increasingly attractive to PE. That being said management is long entrenched and unlikely to pursue a buyout.

Potential Reasons for Current Valuation:

Liquidity Concerns
There has been some concern related to the Jack's liquidity and ability to cover its interest etc. The business is a large producer of operating cash flow and the majority of its capex (related to re-imaging existing stores or building new ones) can be delayed to manage through any tightness fairly easily. Given the continued tough environment for commerical/real estate focused builders in CA/TX etc, builders are willing to accept rather agressive payment terms.

Refranchising Concerns

There is a very valid fear of terms continuing to deteriorate and Jack's further need to providde seller financing (whether in the form of deferred payments or breaks on royalties). In talks with a handful of QSR franchise brokers, it appears that valuations for Jack are holding steady and are held above a floor by the cost of new franchise build and the 15-25% cash on cash returns available to Jack franchisees. Furthermore, the brokers we spoke to say Jack has been prudent in screening potential buyers but did comment that most of the units being sold are re-imaged ones which is a slight negative but to be expected. I have assumes $580k net proceeds in my calc below which is slightly below with what Jack is stating publicly.

Difficult Sales Environment
-negative comps at both Jack and Qdoba in 2009
-Increased competitive discounting with QSR focusing on value and Casual Dining encroaching on QSR price points
-Rising unemployment in California (12.3%) and Texas (8.0%)
-Lower grocery prices coinciding with QSR downturn as families look to eat at home
-Jack is strong in all day parts with lunch/dinner only representing 55% of Sales
-Continued weakness in franchisee financing could delay expansion plans impact franchisee economics

Overview:
Jack in the Box is a quick service restaurant (“QSR”) operator of two concepts, Jack in the Box, a 2,212 unit hamburger chain concept with operations in the Istern and SouthIstern US and Qdoba Mexican Grill, a national 500 unit fast casual mexican concept. The Jack Concept franchised/owned mix is 46%/54% and represents $385mm or 91% of the pre-corporate 2009 EBITDA of $422mm. Company owned EBITDA (Jack+Qdoba) represented $302mm or 72% of the 2009 pre-corporate EBITDA.

Jack has been undergoing a refranchising strategy since 2005 when only 22% of its restaurants Ire franchised. The company has publicly announced a plan to refranchise 150-190 units a year with the ultimate goal of a having an 80%/20% franchised/owned mix which is in-line with the other public QSR operators. I believe the refranchising program is value accretive to the current trading price (once you factor in the increase revenue, cost savings and the proceeds). Furthermore, I believe as the cash flow mix shift more towards dollars generated from franchise fees the stock should experience multiple uplift.

Refranchising Economics
Fundamental to our investment thesis is understanding and correctly valuing the much discussed refranchising program. Given the public commitment to the program and the fact that the sell-side views these as recurring and therefore includes them in their earnings estimates, the company has been forced to induce sales with seller financing and significant rent and royalty breaks.
Using conservative assumptions and discounts to the company’s historical guidance, I believe Jack can still achieve an effective sale multiple of 12x + which represents significant accretion to the current trading level. Furthermore, franchisor cash flow typically and rightfully earns a valuation premium to the more volatile restaurant operator cash flow.

Average Company Operated Unit
Sales 1,420
Unit Level Cash Flow 220
Field G&A (25)
Maintenance Capex (32)

Company-operated Cash flow 163

Franchise Unit - Franchisor Cash Flow

Sales 1,420

Royalties 71
Average Rent Spread 39
Distribution 7
Field G&A (3)
Franchise Cash Flow 114

Cash Flow Hole (49)

Effective Sale Multiple

Average Proceeds (post tax) 580
Franchise Fee 50
Cash Proceeds 630
Cash Flow Hole 49
Implied Multiple 12.9x

If you're looking for a value play on Jack in the Box, it's just not there. Here's why:

1. Company is primarily banking on re-franchising program and growth of it's Qdoba business. It's re-franchising program is falling through (note the big deal that recently fell through) and betting on Qdoba is pretty much like taking a bet on the economy. On top of that they have 1000 Jack in the Box restaurants (-9% comps, referring to company owned NOT franchised) vs their 300 company owned Qdoba at +5% comps.
2. In addition to point 1 if you refranchise your stores you're automatically decreasing revenues. Coupled with a tough economy and forcibly decreasing your revenues how is this stock still $21.00? Overvalued.
3. Sure they're looking to re-optimize their store holdings and decrease their cost structure, let's face it they have no organic growth and no other growth opportunities outside of Qdoba and Jack in the Box. It's also important to note that their pace in new store openings has also decreased plus the fact that they closed 46 underperforming stores in the past year.

Recommendation: Short/Sell
Price Target $17.75

I think it got hit too bad by the earnings disappointment. Should bounce back 5-10% in the short term. As far as long term goes, you're getting the stock for a good price at these levels with IMHO a downside of about 10-20% and potential for 60+ % gains. These gains will only happen if they continue to grow their Qdoba division well as they have been and their restructuring of their "boxes" goes good.

Discount shopping.

Qdoba!

Just adding a pitch to remind myself why I thumbed it.
This was part of my short resturant thesis in 2008. This pick didn't really work out, probbaly casue I did comapratively little resarch on JACK vs the others. However the vast majority of the others did.

The QSR segment held up pretty well, which makes sense in retrospect.

Currently have no opinion on JACK

way undervalued. good balance sheet, reduced its costs. little debt and a very cool image. also has good growth potentials as it focus to expand nationwide.also the shift to the franchise philosophy helped jack in the box and will continue to do so.a little bargain at this price.