5 Signs You Don't Know JACK


Jack in the Box (NASDAQ: JACK  ) had a fantastic year in 2013 -- zooming up 70% year to date. A stock that has that much momentum behind it tends to attract investors who know more about the stock price than they know about the company. Here are five signs that you don't really know what's going on at Jack in the Box -- and the info you need to get up to speed.

1. You don't know that Jack in the Box has thrived while McDonald's and Yum! Brands have struggled.

While Jack in the Box has crushed the S&P 500 by 41 points this year, McDonald's (NYSE: MCD  ) and Yum! Brands (NYSE: YUM  ) trail the index by more than 15 points.

JACK Total Return Price Chart

Jack in the Box data by YCharts.

Yum!'s KFC concept in China struggled mightily in 2013 due to numerous publicity issues, including contaminated chicken and a bird flu outbreak in the nation. Same-store sales in China declined 30% in April at the height of the bird flu scare.

Source: Yum! Brands SEC Filings.

Investors were panicked. Despite repeated assurances from CEO David Novak that the recovery would be quick and sharp, KFC continued to struggle due to fears that its food was contaminated.

Last month, KFC finally posted flat same-store sales and Yum! posted a modest increase in the China division overall due to 7% same-store sales growth at Pizza Hut. The good news led to a surge in Yum!'s stock price, but it is still up only 13% year to date.

McDonald's problems are even more worrisome than Yum!'s. While Yum! can blame specific incidents for its decline -- contaminated food and the bird flu scare -- McDonald's stagnant same-store sales growth could be a sign that consumers are leaving for other chains.

For years, investors have assumed that McDonald's has a durable competitive advantage due to its vast scale. The world's largest burger chain earns a higher operating margin than its rivals and can generally attract better franchisees, but the lack of switching costs may be eating into McDonald's business. McDonald's U.S. same-store sales came in below expectations in November, continuing a trend of worsening sales in 2013. Burger King and Wendy's have offered promotions in 2013 that have likely had an impact on McDonald's sales. In addition, investors worry that fast-casual concepts like Chipotle Mexican Grill and Jack's own Qdoba are stealing would-be McDonald's customers. The result is a mere 10% stock price increase year to date.

2. You don't know that Jack in the Box radically changed its model over the last five years.

Just five years ago, 62% of Jack in the Box's 2,158 restaurants were company-owned and operated. The company was spending more than $150 million per year to maintain its Jack in the Box and Qdoba locations, which generated about $180 million in cash flow from operations.

Today, the company owns just 21% of its stores (the rest are owned by franchisees) and aims to lower that percentage to just 15% in the years ahead. The massive refranchising effort, in which Jack in the Box sold company-owned locations to franchisees, significantly reduced its capital spending and increased the predictability of cash flow. The result: In fiscal 2013, the company generated $198 million in cash from operations and spent just $85 million on plant, property, and equipment.

Jack in the Box is now in a position to return more cash to shareholders. The company has yet to pay a dividend, but management is committed to repurchasing stock.

3. You don't know that Qdoba and Jack in the Box have significant growth opportunities.

Jack in the Box is already the second- or third-largest hamburger chain in each of its top 10 markets, but it still has a lot of room for growth. The chain is in only 21 states -- predominantly in the western and southern United States -- and can quickly expand eastward via franchising. Qdoba Mexican Grill, the second-largest fast-casual Mexican brand in the United States, is growing faster than Jack in the Box; management plans to pursue aggressive growth for the concept as it feeds off the popularity of Chipotle.

Management expects comparable-store sales to grow 1.5% to 2.5% in the first quarter of 2014 and also sees restaurant profitability improving over the course of the year.

4. You don't know that institutional investors are still buying the stock.

Retail investors are not the only ones fired up about Jack in the Box's turnaround. Institutional investors have been gobbling up shares as well -- even after the massive run-up in the stock price. New York-based asset manager BlackRock recently doubled its stake in the company and now owns more than 10% of shares outstanding. If the "smart money" is right, the stock has a lot more room to run.

5. You don't know that the stock isn't cheap.

One of the things I have noticed in the comments section of many articles is that novice investors like to look at a stock's historical return to predict its future return. This is a surefire way to end up in the poorhouse.

Jack in the Box had an outstanding year in 2013, but rarely does a stock that increased 70% in one year offer a similar return in the next. The stock trades at more than 20 times the high end of management's guidance for 2014 earnings per share; this is not an undervalued stock.

Jack in the Box has a long runway for growth, especially with its franchise-heavy model and fast-growing Qdoba concept, but investors may have better luck investing in McDonald's at 17 times this year's earnings rather than chasing a momentum stock.

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