An analysis of Jack in the Box; My favorite travel shoes/boots
1) Today, I'm sharing an analysis I did of fast-food restaurant chain Jack in the Box (JACK).
I'm doing so for two reasons:
- To show how a company's financial statements tell a story – one you should believe far more than whatever management is saying, and
- To show my readers how I do a quick analysis of a company to determine whether it's worth doing more research on it.
But first, I'll share some background...
More than two decades ago, in 2003, I bought Jack in the Box when the stock got clobbered due to a crazy price war between McDonald's (MCD) and Burger King, which is now owned by Restaurant Brands International (QSR).
I roughly doubled my money in less than two years as JACK shares went from less than $10 to nearly $20, but then I sold too early.
As you can see in the chart below, the stock rose to nearly $40 per share by mid-2007. Then, after doing nothing for five years, it spiked to about $100 per share by early 2015:
As of yesterday's close, JACK shares are at $71 – far below the all-time high above $120 that they reached three years ago, and at a level they first reached nearly a decade ago.
So when I saw that management was presenting at the ICR conference in Orlando, Florida, in January, I went to hear their story and then took a look at the company and the stock.
By the way, regular readers will recall also that I shared my analysis of another fast-food company I saw at the conference, Denny's (DENN), in my January 10 e-mail.
Jack in the Box currently has a market cap of about $1.4 billion and an enterprise value ("EV") of about $4.4 billion due to $3.2 billion of debt ($1.75 billion of long-term debt and $1.44 billion in lease obligations).
The stock trades at 2.7 times trailing-12-month revenue, 8.1 times EV/EBITDA, and 12.7 times earnings.
So let's dig into the financial statements to see why the stock did so well through 2014 and into early 2015 – and why it has been flat since...
Looking first at revenue and operating income, revenue shrunk from 2009 to 2012 due initially to the global financial crisis and then to a refranchising initiative, in which Jack in the Box sold most of its company-owned restaurants to franchisees.
Done properly, this reduces revenue, but increases profits – and, sure enough, the company's operating income more than doubled from $88 million in 2010 to $208 million in 2015.
But then as refranchising finished, profit growth stagnated for four years, dipped in 2020 due to the pandemic, rallied in 2021, and then benefited the past two years thanks to the $575 million acquisition of Del Taco, which closed in March 2022.
The chart below tells the story:
Turning to the cash-flow statement, operating cash flow has been flat for nearly two decades.
But in the chart below, you can see the benefits of refranchising in the 80% reduction in capital expenditures ("capex") from $204 million in 2009 to only $41 million in 2021 (ignoring the unusually low $20 million during the pandemic in 2020):
Thanks to the roughly stable operating cash flow and greatly reduced capex, Jack in the Box has gone from generating no cumulative free cash in the 10 years from 2002 to 2011 to a total of $1.4 billion since then.
The company has used this free cash flow mainly to repurchase shares and, secondarily, pay a modest dividend (currently just over 2.4%).
The result has been a nearly 80% reduction in the number of diluted shares outstanding:
If you look closely at the cash flow and share-repurchase charts above, you might wonder: "How did a business that, from 2014 to 2018, generated an average of $115 million in annual free cash flow buy back an average of $324 million of stock each year?"
The simple answer is that Jack in the Box took on debt, which more than doubled from $499 million to $1.07 billion from 2014 through 2018.
Reported debt doubled again in 2020 due to new accounting rules for lease obligations and rose further in 2022 due to the purchase of Del Taco. Take a look at this chart:
With total debt to EBITDA now at 5.7 times, the company has no more ability to take on debt. This is why share repurchases have slowed to a trickle the past two years, averaging only $59 million annually.
In summary, while Jack in the Box isn't expensive at 8.1 times EV/EBITDA and 12.7 times earnings, it's not particularly cheap.
And it would need to be really cheap for me to be interested in it, given the many warning flags: high debt, falling cash flow, rising capex, and a likely end to meaningful share repurchases.
Like Denny's, Jack in the Box appears to be a no-growth business that was trying too hard to prop up the stock price with a big acquisition and debt-fueled share repurchases...
2) I've been to 13 countries in the past six weeks... and that's pretty extreme, even for me!
During my travels, I've used all of my favorite travel items, so I figured I'd share them over a number of e-mails.
In my March 6 e-mail, I discussed my favorite one: my Matein rolling backpack, which is all I need for up to two weeks of travel.
One of the reasons I can fit everything into this small bag is that I only bring the shoes I'm wearing.
As such, they need to be shoes that are comfortable enough to walk around in all day, athletic enough to go to the gym or for a run, yet look nice enough to wear to dinner at a nice restaurant.
My answer? On's (ONON) Cloudmonster Sneakers (depending on size, $169 to $183 on Amazon):
Alternatively, if I'm going to be doing more hiking and/or getting wet and muddy, I instead wear these Salomon boots, which are waterproof, but still look nice ($230 on Tactical Distributors):
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.