Jack in the Box Upgraded to Strong Buy - Analyst Blog

On Mar 8, 2014 Zacks Investment Research upgraded Jack in the Box Inc. JACK to a Zacks Rank #1 (Strong Buy) driven by the strong fiscal first quarter 2014 results posted by the company in Feb 2014.

Why the Upgrade?

Jack in the Box posted strong fiscal first quarter 2014 results with earnings of 75 cents beating the Zacks Consensus Estimate of 66 cents by 13.6%. Earnings increased 27.1% year over year. The upside is attributable to top-line growth, decline in operating costs and lower share count. The decline in operating costs can be attributed to the company's continuous efforts to improve its costs structure by identifying opportunities to reduce general and administrative expenses.

Though revenues declined marginally year over year, it easily surpassed the consensus mark by 3.4%, which we believe was due to year over year improvement in comparable same store sales. Improved comps during the fiscal first quarter reflect less discounting and continued growth in catering sales. The company operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants. As in the fiscal first quarter, the company expects same store sales at both of its brands to continue to grow year over year in the fiscal second quarter as well as fiscal 2014.

Driven by the strong results and an optimistic outlook, estimates for 2014 largely moved upwards. Moreover, the average positive surprise for the last four quarters came in at 8.42%.

Jack in the Box is also working on its refranchising strategy. We believe franchising a large chunk of its brands would allow it to generate strong free cash flow, thereby helping it to maintain a healthy balance sheet. Moreover, if a major portion of its business is franchised, the company will less likely be affected by inflation compared to its peers.

Menu innovation is also a driving force and the key to the success of restaurateurs. In order to improve brand recognition and cater to changing consumer demand, Jack in the Box is upgrading its offerings to provide differentiated value propositions. Recently, the company came up with new Monster Taco flavors, Bacon Ranch and Nacho, which would aid in improving traffic. Going forward, the company aims at further innovation and intends to provide limited time offers.

Other Stocks to Consider

Other players in the restaurant industry, which look attractive at current levels, include Brinker International, Inc. EAT, Buffalo Wild Wings Inc. BWLD and Burger King Worldwide, Inc. BKW, all with a Zacks Rank #2 (Buy).