Jack in the Box: Extra Earnings with a Side of Fries

| About: Jack In (JACK)

Nothing satisfies investors like profits. Jack in the Box (JBX) served up another filling meal with its fiscal fourth quarter results on Tuesday, giving shareholders a treat with better-than-expected earnings and guidance for more growth ahead.

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 closed Tuesday at $61.39, up $2.82 on the day thanks to its strong Q4 results, favorable guidance, and plans to repurchase up to 5.5 million shares which would reduce shares outstanding by 15.5%.

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 more than 300 locations in 40 states. Same store sales were up 5.9% in the fourth quarter, and operating margins increased to 17.8% from 17.3% a year earlier. For the fiscal year 2006, earnings surged to $3.04 from $2.48 a year earlier, though a net 29 cents per share were due to special factors. Revenue increased to $2.77 billion on the year from $2.50 billion in FY2005.

Jack in the Box also issued impressive 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 re-franchising 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. 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 $3.02-$3.07/share for FY2007, Jack in the Box is trading at roughly 20 times forward earnings and that's right 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

JBX 1 yr chart

Disclosure: Author has no position in JBX

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