Mark Perkins sends: Jack in the Box (JBX) is a fast food company that has been around since the early 50s. They offer a variety of hamburgers, salads, tacos and desserts. The majority of their stores (about 900 of the 2,100 total) are in California, although they are in 17 states including Hawaii. There is a reason I am bringing this up… look at how many more stores they can open in markets they haven’t even stepped foot in! Some of their competitors like McDonald’s have already reached a saturation point, but Jack in the Box still has room to grow.

Keeping Things Simple
It is nice to see an annual report that doesn’t try to spin everything to make the company’s prospects look as amazing as possible. In the annual report they focus on diluted EPS growth instead of regular earnings growth - I like how they are not trying to sugar-coat anything. The report is a little flashy and colorful but I can forgive them for this.
I almost forgot one of the best parts of Jack in the Box, Qdoba Mexican grill. This is a quick-serve type restaurant where you can customize your burritos and tacos before sitting down to dine in or carry out. Qdoba has higher than average prices but the quality is great. Jack in the Box has a value menu as well and relatively inexpensive items to appeal to a wide spectrum of fast-food customers.

Future Outlook
People get hungry 3 times a day so they should have a long-term ability to stay in business. The industry is very competitive but Jack in the Box satisfies its customers with a value priced variety of offerings. Both of their restaurants serve Mexican-American foods which I see as a good thing as the Hispanic population in the U.S. is growing enormously and the rest of the country slowly blends Hispanic food into its culture.

Fundamentals
Same-store sales growth is the most important measure because its easy to open new stores for revenue growth without growing the existing stores. Both Jack in the Box and Qdoba have growing same-store sales. Most recently, the company said it expects a 5.5 percent to 6 percent same-store sales growth at Jack in the Box outlets and a 3 percent to 5 percent same-store sales increase at Qdoba restaurants. They have also increased their guidance for fiscal 2007 EPS to between $3.62 and $3.66 per share.

Jack in the Box
Market Cap: 1.97 Billion
ROE: 23%
Debt-to-Equity: .86
Forward P/E: 15.8

Valuation vs. Peer Group
Burger King (BKC)
Market Cap: $3.42 Billion
ROE: 23%
Debt-to-Equity: 1.32
Forward P/E: 17.2

McDonald’s (MCD)
Market Cap: $65.6 Billion
ROE: 11%
Debt-to-Equity: .54
Forward P/E: 18.0

Yum Brands (YUM)
Market Cap: $17.4 Billion
ROE: 61%
Debt-to-Equity: 1.64
Forward P/E: 18.3

This kind of relative valuation to its peers with earnings multiples is only a piece of the pie in considering a company for investing. As an example of its limits as the sole method of valuation, look at the valuations of all the tech companies like Sun Micro (JAVA), Amazon (AMZN), Apple (AAPL), etc. just before the market crash in 2000. To pick even the most “undervalued” of those based on price to earnings would have been disastrous. Some professionals will use this peer comparison as the meat of their analysis, but that analysis is incomplete. The company must be compared of course to its competitors but too much emphasis on relative valuation is dangerous.

Opportunity Cost
The risk free long-term government bond yield is 4.75%. Flipping the P/E gives “Earnings Yield,” and the inverse of JBX’s P/E of 15 is an earnings yield of 6% right now along very conservative growth target of at least 9% per year. This beats the risk-free rate.

Bottom Line
Jack in the Box should grow earnings just 10% a year buy entering those new markets for 5 years. As they do this they should have EPS of at least $5.77 in 2012. If then the stock trades at just a PE multiple of 15 then that makes JBX an $86 stock, or a 48% return which works out to 8% compounded annually. If the market is feeling a little more ecstatic a multiple of 20 could easily be attained then the return is 98% and the yearly compounded return is 14%.
Using cash flow, growth using that metric at 10% annually discounted back to present at 9% gives a net present value of $80/share, or 28% above the most recent close.

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