Mark Perkins sends: With McDonald’s (MCD)and Yum Brand’s (YUM) moving up in tandem and Burger King (BKC) trading higher, Jack in the Box (JBX) is getting left behind. The stock is only 6% above its 52-week low, and for the long-term I find it hard not to like this company, especially when stacked up against its peers’ valuations - an argument I made in September.

Looking at JBX at a 52-week low and similar stocks at 52-week highs raises a valid question: why not buy something like MCD on the strength of the stock? I do realize McDonald’s has been running very well recently, I just don’t like the price. Do you remember just a few years back when investors had practically given up on them? The menu was horrible, nothing innovative was happening and they were on the slow road to boring growth… but they still had very a profitable business model - an enduring trait that has saved McDonald’s on several occasions. Think back to the early days of the company when McDonald’s founder Ray Croc was struggling - he hired Harry Sonnenborn, who focused on franchising. Pretty soon half of McDonald’s profits came from franchising and McDonald’s was saved from a looming bankruptcy.
The lesson to learn? It doesn’t take tremendous changes to turn around companies with strong brand recognition and solid economics. Companies with durable competitive advantages can be turned around. Jack in the Box has had some major speed bumps over the years and always come through. Jack in the Box is about three years into a make-over, and has been improving their image with a great ad campaign and is a better company now than it was just two years ago.

JBX 1-Year Chart
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At the fourth quarter earnings call in November, Jack in the Box CEO Linda A. Lang affirmed the companies long-term vision which included “expanding franchising and improving our business model.” Growth from both the Jack in the Box and Qdoba segments have been great, and Jack in the Box stores had “their highest full year increase in same-store sales since 1999 and the two-year cumulative increase of 10.9% is among our highest ever.”

Jack in the Box should earn $2.05 per share in 2008, putting shares at 12.75x earnings for an effective yield of 8%. I anticipate growth ahead to be between 12% and 14%, making JBX attractive at these market prices. They have done a very good job of keeping escalating commodity costs in check and Qdoba is a vastly underappreciated profit driver.

While JBX shares have struggled of late, the lower price offers an increasingly high chance of good returns. Jack in the Box is getting it done with their operating results, unique and diverse menu items, guest satisfaction and high productivity. Now all you need to do is be patient and wait for the stock market to more fully reflect the fundamentals.

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