The coronavirus upended life in much of the U.S. in 2020, but restaurant stocks have notched a huge recovery over the course of 2021, observes Bob Ciura, contributing editor to Sure Dividend.

As the economy recovers and restaurants reopen, the entire industry is getting a lift. A continued recovery appears likely for restaurant stocks for the remainder of 2021 and beyond.

Jack in the Box (JACK) is a fast-food chain that operates and franchises hamburger chains in the U.S., with more than 2,200 restaurants in 21 states and Guam.

The company has a market capitalization above $2 billion. Jack in the Box previously owned the Qdoba brand, but sold it to Apollo Global Management in 2018 to focus on its core brand. Still, the company has a strong U.S. footprint.

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Source: Investor Presentation

‪In mid–May, Jack in the Box reported financial results for the second ‪quarter of fiscal 2021 ‪(ending 9/30/21). Restaurant traffic declined –5.4% over last ‪year’s quarter ‪due to COVID–driven dine–in restrictions. However, the average check grew 19.9% and resulted in 14.5% same–store sales growth.

‪Thanks to this impressive growth, adjusted earnings–per–share more than tripled, from $0.50 ‪to $1.58, and exceeded analysts’ consensus by $0.19. The outstanding ‪performance resulted from the popularity of the all–day menu, many menu innovations, stimulus checks as well as the low comparison base of last year’s quarter due to the pandemic. Management also raised the dividend 10%.

‪The performance of Jack in the Box is ‪impressive and can be attributed, at least in part, to its affordable menu and the appointment of a new ‪CEO, who has ‪put the company back to its growth trajectory, after three years of stagnation. Thanks to the business momentum, ‪we have raised our ‪earnings–per–share forecast for fiscal 2021 from ‪$6.20 ‪to $7.20.

Jack in the Box has repurchased its shares at an aggressive pace in the last five years. During this period, it has reduced its share count by 36%. Share repurchases will be a major component of future EPS growth. During the last decade, the company has grown its EPS at a 5.9% average annual rate.

We expect the company to grow EPS by 9.0% per year on average over the next five years. Jack in the Box is expected to earn $7.20 this year, giving the stock a price-to-earnings ratio of 15.1, which is lower than its 10-year average of 20. If the stock trades up to our target valuation of 18x earnings, shares would generate a ~3.3% annual return.

Expected EPS growth of 9% and the 1.6% dividend yield would further boost returns, leading to total expected returns of 13.9% per year over the next five years. Such a high rate of return makes JACK our top pick among restaurant stocks.

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