Thursday September 27, 2012
by Geoffrey Seiler, editor BullMarket.com
Analysts at Jefferies met with
Jack in the Box (
JACK) management earlier this month, saying that they came away even more confident that the drivers behind the company's top-line growth remain intact and that cost-saving efforts should have a quicker-than-expected impact.
With the company's refranchising programs coming to a close, Alexander Slagle thinks Jack should see a big jump in free cash flow, which it could then use to buy back shares and to make accretive franchise acquisitions.
"With the restaurants now reimaged and the brand seeing continued momentum in speed of service and consistency, we get the sense that management is increasingly confident in its ability to drive sustainable same store sale," analyst Slagle wrote.
In our view, Jack in the Box has progressed nicely this year, as sales at its namesake restaurant have perked up and restaurant level margins continue to improve, showing the type of operating leverage we thought was achievable now that its refranchising and re-imaging campaigns are nearing completion.
Even during the Great Recession when the company was struggling, we believed that management was making the right moves for the long term, and these efforts have finally begun to show results this year.
Meanwhile, we continue to believe Qdoba is a strong No. 2 Mexican quick casual concept behind rival Chipotle and view it as a solid growth driver in the years ahead.
As the concept gains scale, margins should further improve and the possibility of a spin-off to unlock value is possible.
Trading at just around a 7.5x FY13 EV/EBITDA multiple, we think this turnaround story is cheap and still has legs. We continue to rate the stock a "Buy" with a $33 target.
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