Jack Could Pop Up with a Surprise

05/31/2012 4:45 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

If numbers hold for another quarter or so, the fast-food chain could be a strong value pick, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Jack in the Box (JACK) looks like it could be a profitable turnaround/value story, but I’d like another quarterly report or so to answer some nagging questions. For now, it goes on my watch list.

What’s interesting about Jack in the Box is that the company actually operates two very different restaurant chains. There’s the Jack in the Box hamburger chain with about 2,200 restaurants, and Qdoba Mexican Grill with 600 outlets.

The company has been converting its hamburger restaurants to franchises in order to raise margins (and reduce capital demands for the refreshes necessary to keep up with McDonald’s (MCD) these days). 72% of the company’s Jack in the Box restaurants are now franchises, versus 57% in the company’s 2010 fiscal year.

At the same time, Jack in the Box has been aggressively opening new Qdoba Grills. These Mexican restaurants have a not-so-coincidental resemblance to Chipotle Mexican Grill (CMG) with an emphasis on “hand-crafted preparation,” a “passion for ingredients," a “display cooking environment,” and “innovative flavors.”

The Qdoba Grills show an average check of $9.74, versus the $6.25 average check at a Jack in the Box. The company believes it can open 2,000 Qdoba restaurants in the United States and grow the number of units at 15% to 20% a year.

The total goal is 25% compound annual growth in EBITDA (earnings before interest, taxes, depreciation, and amortization) from 2011 through 2015. Jack in the Box has set a target of $2 a share in operating earnings by 2015.

So what do I learn from the company’s next quarterly numbers, scheduled for release on August 8? Well, I’d like a little better assurance that Jack in the Box can actually deliver on those plans—especially at Qdoba.

Results for the second quarter of fiscal 2012 announced on May 12 raised doubts in exactly that critical area. The company’s guidance for comparable-store sales for fiscal 2012 fell to 3.5% to 4% from the prior 4% to 5%. And the company reduced its projections for how many new Qdoba units it would open in fiscal 2012 to 60 or 70, from the earlier 70 to 90.

The company’s explanation was that it was slowing growth to study opportunities in recently opened franchise markets. That often means that a company is trying to determine how densely it can pack restaurants without hurting existing franchise operators. But it seems early in Qdoba’s growth for that kind of caution.

I’d like to make sure that I’m buying a real growth story here, rather than merely shares in a company looking for some of the patina of the Chipotle story. That $412 stock (as of May 31) trades at a price-to-earnings ratio of 56 times trailing 12-month earnings, compared to a P/E of 20 for Jack in the Box. Shares of Chipotle are up 43% in the last year, versus a very respectable gain of 17% for Jack in the Box.

Jack in the Box is due to report earnings next on August 8.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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