Jack in the Box is a prominent player in the fast food industry, operating restaurants under its flagship brand as well as Del Taco, which specializes in Mexican-style fast food.
The fast food sector is currently navigating several challenges, including rising labor costs, increasing food prices, and recent spending slowdowns among lower-income consumers. Moreover, the industry faces intense competition, with many companies boosting value deals to attract customers.
This competitive landscape has significantly impacted JACK’s share price, which has been halved from its highs in 2023. This substantial decline presents an opportunity to re-evaluate the stock’s potential.
Indicators of Potential Undervaluation
Price to Earnings Ratio and Dividend Yield
JACK’s current price-to-earnings (P/E) ratio is extremely low, suggesting potential undervaluation. The stock offers an attractive yield of approximately 3.5%, which further indicates it might be undervalued.
The long-term charts also signal undervaluation and hint at a potential buying opportunity.
Historical Price Trends
Examining the long-term chart, the stock fell to around $32 during the Covid market correction in 2020, subsequently tripling in value to approximately $120 per share within a year.
In 2023, the stock peaked at around $100 and has since dropped to half that level. Historically, the stock has rarely traded below the 200-month simple moving average, making the current price level a potential buying opportunity reminiscent of the Covid market lows.
Financial Performance and Estimates
Earnings Estimates and Balance Sheet
Analysts expect modest revenue growth for Jack in the Box, with earnings growth driven by cost-cutting measures and lower food inflation. Projections for 2024 anticipate earnings of $6.32 per share on revenues of $1.59 billion, with earnings expected to grow by approximately 12.55% in 2025 to $7.11 per share, despite a slight decline in revenue. By 2026, earnings are projected to rise over 12% to $7.99 per share, with revenues remaining flat.
Despite these positive earnings forecasts, the balance sheet shows $3.18 billion in debt and just over $20 million in cash. The food business’s steady cash flow helps offset the high debt levels, and the company may reduce debt by refranchising or selling company-owned stores.
Dividends and Share Buybacks
Dividend Yield and Payout Ratio
The current quarterly dividend is $0.44 per share, totaling $1.76 per share annually, yielding about 3.5%. This yield appears secure, with a payout ratio of approximately 29%, offering shareholders income while waiting for share price appreciation.
Share Buybacks
In Q2 2024, Jack in the Box repurchased approximately 200,000 shares for $15 million. The company has $210 million remaining in authorized share buybacks, representing over 20% of its current market capitalization of around $973 million.
Growth Prospects
Domestic and International Expansion
Jack in the Box and Del Taco have significant expansion potential both domestically and internationally. The company has been opening new locations in Mexico, and management sees long-term growth opportunities.
While analysts expect flat revenues over the next couple of years, management’s long-term strategy suggests substantial growth potential.
Menu Innovations
The introduction of the “Smashed Jack” burger demonstrates Jack in the Box’s potential for revenue growth through menu innovation. The limited initial rollout was extremely successful, selling out quickly due to high demand. Plans for a national rollout could positively impact revenues in the coming quarters.
Potential Downside Risks
Management and Operational Risks
Potential risks include management’s ability to execute cost-cutting measures and drive growth. Additionally, the company needs to address its high debt levels, especially given the current higher interest rate environment.
Competitive and Market Risks
The competitive nature of the fast food industry, particularly with competitors offering aggressive value deals, poses a risk. Moreover, economic pressures on lower-income consumers could impact sales. Trends toward healthier eating and the growing popularity of weight-loss drugs might also reduce demand for traditional fast food.
Conclusion
Jack in the Box faces challenges, but these may already be reflected in its current stock price. With a P/E ratio significantly lower than that of McDonald’s and an attractive dividend yield, the stock appears undervalued.
Historical trends suggest that the current price level offers a potential buying opportunity similar to the one seen during the Covid market correction.
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Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
