Strong Earnings Have Jack in the Box Stock Jumping

| About: Jack In (JACK)

Nothing satisfies investors like profits. Jack in the Box (JBX) served up another gut-buster of a meal with its fiscal first quarter results on Wednesday. Earnings of $1.03 per share blew away the consensus of $0.81 and same store sales grew an impressive 5.6%. The company also raised its guidance for 2007. JBX may not top the culinary charts, but it sure gets the job done in more ways than one. The stock surged over $6 on the news Wednesday and is up $10 since we wrote about it in November.

Over the years, Jack in the Box has demonstrated a masterful touch with brand and promotion, which helps this quick serve food chain deliver results that have underpinned a stellar stock performance. JBX was at $19.26 when we wrote about it in May, 2003. The stock jumped to $70.69 on Wednesday morning thanks to its strong Q1 results and favorable guidance. Jack in the Box said it now expects earnings of $3.27 to $3.33, up from prior guidance of $3.02-$3.07. The company also issued an outlook for same store sales growth of 3.5% to 4.5% in the second quarter.

Jack in the Box is a regional chain but through its aggressive expansion strategy it is quickly heading toward national brand status. It operates or franchises over 2,000 Jack in the Box restaurants in 17 states. Meanwhile its Qdoba Mexican Grill, offering fast casual dining, has grown to nearly 350 locations in 40 states. The company said that increases in transaction volume and average check size contributed to the strong gain in same store sales. Operating margins increased to 18.4% from 16.4% a year earlier.

Jack in the Box has given long-term guidance including a stated goal of 12%-15% annual earnings growth on same-store sales growth of 2-4% at Jack in the Box locations and 3-5% at Qdoba restaurants. Jack in the Box is refranchising many company operated stores with a goal of 35% franchise operated by 2008 from 29% currently, and it is exploring the franchising of entire markets. The company is also aggressively repurchasing its own stock, which could reduce the number of shares outstanding by 5.5 million shares or 15.5%.

When we looked at JBX three years ago we noted a conservative valuation relative to its expected growth rate and its peers, but this stock isn't the bargain it once was. Based on company EPS guidance of $3.27-$3.33/share for FY2007, Jack in the Box is trading at 21 times forward earnings and that's roughly in line with McDonald's (NYSE:MCD) and Yum! Brands (NYSE:YUM), two of its closest competitors.

Jack in the Box is the fourth largest quick serve food chain in the US. Most of its 2000+ restaurants are located in the West and Southwest. The company has executed well on its expansion strategy, and initiatives to revamp the menu and the restaurant experience are resulting in higher average check and transactions.

Jack in the Box is well known for the ongoing advertising campaign featuring the recognizable (though fictitious) founder, Jack, with his giant ping pong ball for a head. The company is also known for its ability to roll out many innovative sandwich products, often far outside the traditional burger fare, to spur sales and distinguish itself from the competition.

The company plans to continue adding new restaurants at a pace of 40-45 Jack in the Box locations in 2007 and 80-90 new Qdoba restaurants. While this stock does not offer the value it once did, it does have a combination of growth and stability. Geographic expansion, strong and growing earnings, and fewer shares contribute to a recipe that may not be gourmet but one that gets the job done at meal time.

JBX 1-yr chart

Disclosure: Author has no position in JBX.