Market Overview

Morgan Stanley's Drive-Thru Pair Trade: Buy Restaurant Brands International, Sell Jack In The Box

Share:
Morgan Stanley's Drive-Thru Pair Trade: Buy Restaurant Brands International, Sell Jack In The Box
Related JACK
77 Biggest Movers From Yesterday
68 Stocks Moving In Thursday's Mid-Day Session
Notable earnings after Monday's close (Seeking Alpha)
Related QSR
Analysts Weigh In On Wendy's Quarter, Sales Decline
Earnings Scheduled For October 24, 2018
10 Of 59 Consumer Cyclical 'Safer' Dividend WallStars Flash 25.6%-50.8% Gains Per Broker November Targets (Seeking Alpha)

A plethora of quick service restaurant chains have undergone a refranchising process in the last five years, with company-owned stores being sold to franchisees, Morgan Stanley said in a sector-wide industry report. Now that the process has mostly come to an end, the sell-side firm has become incrementally more positive on Restaurant Brands International Inc (NYSE: QSR) and less positive on Jack in the Box Inc. (NASDAQ: JACK)

The Analysts

A team of analysts led by John Glass upgraded Restaurant Brands' stock rating from Equal-Weight to Overweight with a price target lifted from $69 to $71. The analysts downgraded Jack in the Box's stock rating from Overweight to Equal-Weight with a price target lowered from $106 to $95.

QSR: Bear Case Scenario Nothing To Fear

QSR, the parent company of Burger King, Tim Hortons and Popeyes Louisiana Kitchen, is the "single most dislocated" stock versus the general restaurant industry based on multiple valuation metrics, including free cash flow yield, Glass said in the upgrade note.

The company has the potential to return more than 40 percent of its market cap to investors over the next three years, partially aided by one of the highest dividend yields in the group at more than 3 percent, according to Morgan Stanley. 

Investors do have reason to be concerned with Tim Horton's slow sales, as the iconic Canadian coffee brand accounts for 50 percent of total earnings, Glass said. But a "bear case stress test" — in which EBITDA remains flat for two years and total capital expenditure rises to $100 million — QSR would still notch $2.90 in free cash flow per share, the analyst said. Under this scenario, Restaurant Brands' stock valuation "wouldn't be that much lower" than it is now, he said. 

Related Link: Why Restaurant Brands Could Be A Great Growth Stock

Jack In The Box: Debate Might Be Over

The bull-bear debate for Jack in the Box is mostly based on the restaurant operator's free cash flow outlook after it divested Qdoba for $305 million, Glass said.

The debate could be over, as the hamburger chain provided sufficient "clues" in terms of G&A, leverage targets, capex commentary, tax rates and other metrics to "provide a reasonable" free cash flow per share estimate of $5.70 in calendar year 2019, according to Morgan Stanley. 

Jack in the Box's stock warrants a 6-percent target free cash flow yield on an estimated $5.75 per share in free cash flow, which equates to a $95 price target, the analyst said.

Under a bull case scenario, Jack in the Box's free cash flow per share could come in at $6.25, but the figure is based on better cost reductions and stronger sales — a scenario which may not be feasible to assume based on current expectations for only "modest growth," Glass said. 

Price Action

Shares of Restaurant Brands were trading higher by 1.7 percent Monday morning, while shares of Jack in the Box were lower by 0.55 percent. 

Related Link:

Wedbush Develops An Appetite For Jack In The Box

Photo from Wikimedia. 

Latest Ratings for JACK

DateFirmActionFromTo
Oct 2018WedbushDowngradesOutperformNeutral
Oct 2018Gordon HaskettInitiates Coverage OnHold
Oct 2018Morgan StanleyMaintainsEqual-WeightEqual-Weight

View More Analyst Ratings for JACK
View the Latest Analyst Ratings

Posted-In: Analyst Color Upgrades Downgrades Price Target Restaurants Top Stories Analyst Ratings Trading Ideas Best of Benzinga

 

Related Articles (JACK + QSR)

View Comments and Join the Discussion!

Latest Ratings

StockFirmActionPT
LXFTKeyBancDowngrades0.0
CPAImperial CapitalDowngrades68.0
PRMWImperial CapitalInitiates Coverage On18.0
TGTKeyBancInitiates Coverage On110.0
QCOMMorgan StanleyUpgrades0.0
View the Latest Analytics Ratings
Don't Miss Out!
Join Our Newsletter
Subscribe to:
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
Your weekly roundup of hot topics in the exciting world of fintech.
Thank You
for registering for Benzinga’s newsletters and alerts.
• The Daily Analysts Ratings email will be received daily between 7am and 10am.
• The Market in 5 Minutes email will be received daily between 7am and 8am.
• The Fintech Focus email will be received every Friday between 2pm and 5pm.

How Video Game Developers Are Taking On 'Fortnite' — And Why KeyBanc Remains Bullish

This Day In Market History: OPEC Raises Crude Oil Prices By 9%