Jack In The Box Looking Attractive (JBX)

We think fast food purveyor Jack in the Box (JBX) is worthy of a look.

We like to review companies’ long term sales records and in JBX’s case, it’s very pretty. Sales for the period ending 12/96 were $12.1 million, growing each year to close 12/04 at $574.3 million. Net income’s rise wasn’t as smooth but it did grow from $1.2 million to $43.6 million ($0.23 and $1.49 on a per share basis) during the same period, without showing red in between. The company is guiding FY 2005 EPS at $2.45.

The trailing PE is at 12.53, and the forward is even cheaper at 11.92. Compare that to 17.82 trailing and 15.43 forward for McDonald’s (MCD), and a 19.94 forward PE for Wendy’s (WEN).

Just under 3% of shares are owned by insiders, which helps motivate management. Yahoo! reports the last 3 insider transactions as purchases by 3 different employees [note: they may actually have been grants, do your research], valued at $463,854, $352,500, and $531,711—another positive sign.

There is also a growth story for those who want to see one: JBX’s Qdoba brand is marching along successfully, management is in the process of selling company-owned restaurants to franchisees to free up capital, premium items were added to the menu to capture same-store growth, and new items are being developed at a 70,000 sqf R&D "lab" (kitchen?). All this is part of a 3 to 5 year program to reinvent the company, announced in September 2003.

What’s not to like? The PE is low, but it has been low for many years, so you really have to buy the growth story if you expect to see the multiple increase.

We don’t like the level of long-term debt, at $300 million vs. cash of $57 million and a market cap of $1.09 billion (Yahoo!). Sure, there’s much worse out there and this is probably manageable, we are just a debt-averse bunch.

The insider buying is overwhelmed by insider selling, particularly that of Robert Nugent. Where did he get so many shares from and why is he selling like there’s no tomorrow? For details, click here.

Management also can't seem to get their guidance right and have adjusted it way too frequently, at least from our perspective. You guessed it--changing guidance has added to the stock's volatility.

Historically JBX has not expensed its stock options, although this is changing in 2006. Still, keep this in mind when reviewing past numbers.

Lastly, the profit margin for the trailing 12 months clocked in at 3.64%. Maybe future margins will look different, but the past ones are not particularly attractive.

If you like the positives this company has to offer, we recommend researching the negatives and seeing how comfortable you are with them.

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