Jack In The Box: Don't Chase Too Far

| About: Jack In (JACK)

Summary

Jack In The Box is the rare restaurant concept trading at all-time highs.

The store results aren't exactly impressive.

The recent buyback moves suggest not chasing the rally too far.

In what was supposed to be a bad restaurant environment, Jack In The Box (NASDAQ:JACK) soared to new all-time highs last week. The burger concept continues to defy odds with strong operating results.

At $105, the stock recently broke the multi-year resistance right below $100. Now the question is whether an investor should chase one of the few concepts trading at the highs in the beaten down sector.

Store Results Not So Impressive

Jack In The Box hasn't exactly hit a homerun with the results from the stores. FQ4 comp sales were weak similar to the industry with the company comps at Jack In The Box up only 0.5% due entirely to a jump in the average check. Qdoba system-wide comp sales were up a meager 0.8%. For the year, both restaurant concepts generated comps slightly above 1.0%.

During the last quarter, the restaurant operating margin decreased by 30 basis points to 19.7% of sales. The company-owned Qdoba margins were down 220 basis points.

What the company is doing right is removing costs from the headquarters and improving franchise margins. Some of these moves appear more short term in nature, but Jack In The Box forecasts FY17 SG&A expenses to drop below 11.5% of sales, down from 12.7% last year. Such a move could add over $20 million to operating income.

Impressive Yields

The view of the stock is possibly best highlighted by the net payout yield. The yield that combines the dividend yield and the net stock buyback yield was a key sign to buy Jack In The Box on the dip this year.

JACK Chart

JACK data by YCharts

While one might question chasing the recent rally and paying roughly 22.5x EPS estimates for the current fiscal year, the capital returns suggest an attractively priced stock. The BOD recently approved a large 33% increase in the quarterly dividend to $0.30. The dividend yield is only 1.1%, but the key number is the guidance that assumes an incredible $408 million share buyback for the year.

The company spent about $42 million on stock buybacks last quarter and only $292 million over the last year. The key to the story is that Jack In The Box spent a whopping $149 million during the April quarter when the stock dipped into the $60s. As the stock surged following strong quarterly results, the company hasn't bought so aggressively.

Takeaway

The key investor takeaway is that the stock is reasonably priced. One though might want to follow the lead of the restaurant concept and buy the stock on dips instead of chasing the current rally where Jack In The Box likely gets expensive if the stock surges from here and the company doesn't repurchase shares.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.