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Can Jack in the Box Keep Going After Last Week's 14% Pop?

By Rick Munarriz - May 30, 2016 at 10:18AM

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The burger and burrito chain moves higher after a push to franchise gains steam and wins bullish analyst updates.

Image source: Jack in the Box.   

A burger flipper is looking to flip company-owned restaurants, and that's good news for Jack in the Box (JACK 3.16%) investors. Shares of the quick-service restaurants operator moved 14% higher last week following an encouraging investor and analyst presentation.

The head-turning announcement during Wednesday's annual investor and analyst meeting is that Jack in the Box is looking to increase the percentage of its eateries that are franchisee-owned. The company behind the Qdoba and namesake chains is hoping to have 90% to 95% of its locations operated by franchisees within two years, a move that should deliver earnings-per-share growth in the mid-teens through the next couple of years. 

Just 82% of its 2,251 burger restaurants are presently owned by franchisees. Only 51% of its 683 Qdoba burrito joints are run by franchisees. The plan has already been in motion. Jack in the Box had just 72% of its locations in the hands of franchisees four years ago. Jack in the Box is spelling out how unloading its lower volume company-owned locations would result in significant upticks in earnings-per-share growth.

The profit-popping move got Wall Street pros to notice. Baird upgraded the stock, increasing its price target from $80 to $95. Barclays boosted its goal from $79 to $86. 

Growth is on the menu

Jack in the Box's namesake concept is the country's fifth largest burger chain, and all four of its larger rivals have at least 90% of their units in the hands of franchisees. It's a different story at Qdoba, where larger peer Chipotle Mexican Grill (CMG -0.04%) owns the vast majority of its locations.  

Jack in the Box is still in a good groove. The burger chain posted eight consecutive quarters of positive year-over-year comps growth before clocking in with a flat showing in its latest quarter. This comes at a time when the world's largest burger chain was posting negative comps before turning things around late last year.

Qdoba is faring even better. It's working on a 12-quarter streak of positive comps. This comes at a time when Chipotle nipped its enviable string of favorable comps once food safety issues shooed away potential guac jocks late last year. Qdoba's comps have risen just 1.8% and 2.1% through the past two quarters, respectively, but it's a lot better than the double-digit carnitas carnage that Chipotle is presently suffering through. 

Jack in the Box on a leaner cost structure should be a thing of beauty. Net margin has been consistently ticking higher in recent years, and the reduction in capital expenditures as franchisees bear the burden of building out the chain could lead to an even more aggressive stance in returning money to its shareholders. Jack in the Box has spent $1.1 billion over the past four years on buybacks and dividend distributions, and this could be just the beginning.

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Stocks Mentioned

Jack in the Box Inc. Stock Quote
Jack in the Box Inc.
JACK
$57.83 (3.16%) $1.77
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,306.80 (-0.04%) $0.46

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