Jack In The Box: A Boom Or A Bomb In The Box?

May 12, 2022 3:49 PM ETJack in the Box Inc. (JACK)2 Comments1 Like

Summary

  • Jack in the Box shows stable operations amidst external pressures.
  • The acquisition of Del Taco may enhance its market presence and potential expansion.
  • The stock price is still geared downwards, which highlights its potential undervaluation.
  • Dividends remain promising, given the capacity to sustain payments.

Asian Chinese female audience in front ticket counter buying movie tickets , popcorns before movie show time at movie theater cinema

Edwin Tan/E+ via Getty Images

Jack in the Box Inc. (NASDAQ:JACK) continues to prove its resilience and durability today. Positive results are visible despite the still challenging market environment. Growth may not be dramatic, but fundamental stability remains one of its cornerstones. Meanwhile, the stock price does not seem to be appealing as its downtrend persists. But, investors may look into dividend payments as net income remains adequate to sustain it. Plus, Del Taco may strengthen its revenue growth and store expansion.

Company Performance

In recent years, my interest in Jack in the Box, Inc. has faltered. The continued contraction in 2009-2018 was evident, leading to lower sales. But in 2019, it showed that there was still hope for growth. It was during the pandemic that it captured my attention once again. The company proved resilient and durable amidst the stormy market environment. It is a good thing that it remains stable despite external pressures. Indeed, its focus on stabilizing core businesses, leverage, and performing franchises paid off.

In 2021, revenues rose by 12%, reaching $1.14 billion. It fell short of $1.25 billion projections. But what was more apparent was its operating margin of 24% while net income rose by 87%. So amidst market headwinds, operational growth and efficiency remained intact.

Today, Jack in the Box remains a relatively smaller but durable figure in the industry. 1Q 2022 does not show immense revenue growth and margin expansion. But fundamental stability becomes more evident. The operating revenue is $345 million, a 0.6% increase. Meanwhile, the operating margin is lower at 22%. We have to note the decrease in restaurants, offsetting its supposed revenue growth. Also, supply chain and inflationary pressures are causing market headwinds. It is no wonder that these lead to higher costs and lower margins. The slow-moving growth may persist for the next quarters.

Operating Revenue

Operating Revenue (MarketWatch)

Operating Margin

Operating Margin (MarketWatch)

Nevertheless, the Del Taco acquisition and innovations may help it cope with market changes. It will have more capacity to cater to more customers and diversify the products it offers. I will discuss this part in the next section. Also, the labor market is improving with the unemployment rate falling to 3.6%. The average wage also rose to $27.06 per hour in March. It increases the purchasing power of many customers across industries. So, the demand for restaurants may stay afloat.

There are more opportunities to expand this year despite inflationary pressures. In fact, the company aims to reach a 4% annual growth in restaurant openings. The number may be higher once the external factors become more manageable. Likewise, Del Taco amplifies its growth capacity by capitalizing on prudent acquisitions. By 2030, it aims to increase its market presence by having restaurants in 40 states from 27 today.

It is now on the right track, given the pent-up demand for the industry. Also, recent statistics show that the fast-food market may increase to $998 billion. A report shows that the collective amount of fast food spending may reach $200 billion. On average, every American spends $1,200 on fast food annually. For the next few years, it may increase by 2.2%. Thankfully, Jack is keeping up with the evolving market and consumer preferences. It finds more ways to increase its visibility by opening more physical and online stores. Its adaptation to technology may enhance efficiency while expanding. So, it may speed up its revenues by 4.8% and keep its costs manageable.

How Much Every American Spends on Fast Food

How Much Every American Spends on Fast Food (Budget Branders)

This year, I project the operating revenue to increase to $1.79 billion. The value is in line with the average quarterly values from 1Q 2021 to 1Q 2022. It is also a proforma value since I include my revenue projection for Del Taco. I expect better outcomes as it opens more stores. But, it is still conservative since I still consider inflationary pressures. For the next few years, I expect more stable economic conditions. The combined operating revenue in 2023-2026 may increase from $1.76 billion to $2.24 billion. Meanwhile, the operating margin may remain within the 0.20-0.22 range before rebounding to 0.24-0.26.

Operating Revenue

Operating Revenue (Author Estimation)

Operating Margin

Operating Margin (MarketWatch)

What May Stimulate its Revenue Growth

Despite inflationary pressures and fewer restaurants, the demand remains on the rise. System and franchise stores rose by 1.4% and 1.2% despite fewer stores. The increased sales and positive earnings show maintained market share and efficiency. Indeed, Jack maneuvers its business with prudence amidst a challenging market landscape.

Relative to its peers, Jack in the Box holds a 2.7% market share. It is a slight increase from 2.6% in the time series. The industry is lagging a bit due to inflation and supply chain problems. Many restaurants are facing slower revenue growth this quarter. With these numbers, we can see that Jack in the Box is performing even better than the previous year. Despite the rising costs, it knows the optimal production level to sustain its revenues. It shows stability and operational efficiency, helping it to outdo some of its peers.

Market Share

Market Share (MarketWatch)

The opportunities from the pent-up demand amidst inflationary pressures offer more potential. It is good that Jack in the Box is already moving with the digital transformation. It improves its market visibility through online transactions. It is easier and cheaper to manage now that many Americans are still at home. These are the potential growth prospects for Jack in the Box.

Improved Digital and Technological Capabilities

Jack in the Box is adapting to technological trends in the industry. Robotics and intelligent automation are now part of its core operations. It has entered into a partnership with Miso Robotics to deploy AIs in one of its restaurants. With a deeper AI integration, workers may maximize kitchen efficiency. Indeed, these are a great fit for a high-volume restaurant amidst staffing challenges. The efficiency may reduce the required operating hours and costs to produce. It may also lessen transmission risks and employee burnout, promoting safety and comfort. Hence, it may drive revenue growth, margin expansion, and sustainability.

This move will be helpful for its plan to increase its annual store openings by 4%. If the restrictions persist, AIs and MLs can help sustain day-to-day business activities. The absences of some staff may be filled in, which may reduce revenue losses and SG&A expenses. Aside from the decreased traffic that offsets revenue growth, costs and expenses remain a challenge. This quarter. there is a 46% increase in the combined value of SG&A and other operating expenses. It shows that it is returning to its pre-pandemic production levels.

Moreover, it matches the increased online presence. In recent years, online delivery from restaurants has increased by 300%. Today, 34% of customers spend at least $50 per order online. It is a wise move now that many people prefer cashless transactions. It is no surprise that restaurants see a 23% upsurge in online engagement with online offerings. Also, a study done by Square, almost 70% of customers preferred to order from the restaurant directly. The vast majority of them said they do it to support the restaurant amidst uncertainties. So, it is a good thing that Jack in the Box has its own mobile platform and accepts card and e-wallet payments.

How Customers Order Online

How Customers Order Online (Square)

With online stores and AIs, it may be capable of handling larger bulk orders. It may become more efficient as it expands. Physical stores may be easier to manage. Based on the target 4% store openings, the number may increase from 2,214 to 2,304. My estimation shows lower values due to additional spending on AIs and MLs. It may have to balance its acquisition, innovation, and openings. So, the number of restaurants may increase from 2,212 to 2,266. That is why I project a continued revenue and margin expansion in 2024-2026.

Number of Stores

Number of Stores (Jack in the Box and Author Estimation)

Acquisition of Del Taco

Another potential growth driver is its acquisition of Del Taco. It helps that they have similar menu offerings, guest profiles, and cultures. Del Taco keeps up with the trends through the modernization of restaurant designs. Also, it adapts to digital transformation for product deliveries and parking spaces. It is in harmony with the advancements in Jack in the Box. Its expansion in Central California and South Carolina in 2021 may strengthen its market presence.

Moreover, Del Taco has a stable and intact financial performance in 2021. Its operating revenue rebound is evident. It has sure demand, which may help JACK capture more customers and diversify its products. So, the acquisition places the company in a better market positioning. It becomes a stronger QSR player with greater scalability and operating capacity. It has more opportunities to enhance customer experience while maintaining efficiency. Del Taco is already included in the estimated proforma revenue of $1.79 billion. Meanwhile, the combined operating margin may be 20% due to inflationary pressures. But from 2023 to 2026, the values may rebound and rise further as discussed in the previous section.

To be more specific, I estimate a 2% growth to $1.16 billion in Jack in the Box alone. I expect better outcomes as it opens more stores. But, it is still conservative since I still consider inflationary pressures. Meanwhile, I expect Del Taco's annual revenues to range from $530-540 million. It is a slight increase from 2020-2021 values considering the opposite impact of inflation and the pent-up demand for restaurants. It is also 2-4% higher than the operating revenue TTM of $521 million.

One must note that the profitability of Jack is better than Del Taco. It shows that profitability may be a concern behind the cheap deal. Nevertheless, margin expansion in 2021 was evident, showing its substantial rebound. I still believe the company may maintain the operating margin within the 0.20-0.22 range.

Operating Revenue

Operating Revenue (MarketWatch)

Jack Must Watch Out For its Financial Leverage

Despite the growth prospects, the investors must take a look at its Balance Sheet. I find this aspect a concern for the company. Cash dropped by more than thrice in less than a year. Meanwhile, fixed assets and inventories increased, showing more capacity to produce. Borrowings, payables, and accruals decreased by 5%, showing decreased obligations.

But, they show lower liquidity. As you can see, the changes in the working capital and borrowings are smaller than cash. The acquisition of Del Taco entails more borrowings. So, Jack must be more careful to lessen operational risks and liquidity problems. The obvious share repurchases also decrease cash levels. Indeed, its financial leverage has a substantial influence on liquidity and sustainability. Nevertheless, the positive cash flow and steady income show that the expansion remains profitable. It can be proven by the lower yet still positive FCF.

Given all these, the company must beware of external pressures that may slow down growth. It must ensure the sustainability of its continued expansion. With more store openings and innovations, there may be higher costs and expenses. Note that the net-debt-to-equity ratio of 6.5x is higher than the ideal 3x-4x level. But without the operating lease, the ratio will be lower at 3.5x, which is within the ideal range. Either way, it must maximize its larger capacity and efficiency for more revenue. Economies of scale may play a big role in the success of its increased size. It must do its best to capture more demand while keeping its costs and expenses manageable. That way, it will stay comfortable with sustaining potential growth and dividend payments.

Cash, Fixed Assets and Inventories, and Borrowings

Cash, Fixed Assets and Inventories, and Borrowings (MarketWatch)

Stock Price Assessment

The stock price of JACK has been in a downtrend for almost a year. Although it rebounded slightly to $93, the price is now back at $83.34. The value has already been cut by about 10% from the start price. But, the downtrend may show an opportunity for earnings since it makes the stock cheaper. The PE Ratio of 11.31 shows potential undervaluation. Relative to most of its peers, JACK appears to be the cheapest. It shows that relative to the price, JACK has the most earnings, making it the most reasonable.

PE Ratio

PE Ratio (Yahoo Finance)

The investors must also check the dividends. Among the listed companies, only seven of them are distributing dividend payouts. JACK ranks fourth with $0.44 per share. It may not be as high as the other larger companies, but it stays consistent. Also, its Dividend Payout Ratio of 24% is the lowest among them. If we use Free Cash Flow (FCF) for a more conservative computation, the ratio will be 42%. Either way, it has adequate earnings and cash inflows to cover dividend payments. It may be an assurance to investors that the company may meet their expectations. If we want to check the price relative to dividends, the Dividend Discount Model can help.

Dividends, EPS, and Dividend Payout Ratio

Dividends, EPS, and Dividend Payout Ratio (NASDAQ and MarketWatch)

Stock Price

$83.34

Average Dividend Growth

0.02833333333

Estimated Dividends Per Share

$1.76

Cost of Capital Equity

0.04958937198

Derived Value

$85.7013 or $85.70

The derived value confirms our supposition of undervaluation. It is possible due to consistent dividend payments. Hence, there may be a 3% upside for the next 12-24 months.

Bottom Line

Jack in the Box, Inc. shows a stable performance amidst macroeconomic pressures. There may be more growth prospects with its increased operating capacity and innovation. But, it must be more careful with its financial leverage to ensure sustainability. Meanwhile, the stock price is undervalued, but the potential increase is not that enticing. The best thing about investing in the company may be the dividends and the expansion. The recommendation, for now, is that Jack in the Box Inc. is a hold.

This article was written by

Full-time equity analyst/Part-time Investor. Having adequate knowledge and reliable information can help in your investment decisions. Stock market success is possible as long as one is willing to study, risk, and learn.
Follow

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Recommended For You

Comments (2)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.