Stifel: Amid Low Expectations, Jack In The Box Is Now A Buy

Jack in the Box Inc. JACK bagged a sell-side upgrade Sunday after the fast food chain's strategic review ended with a decision not to sell the company. 

The good news was tempered by a Kardashian: Jack in the Box shares dipped Monday afternoon after Kim Kardashian West complained to the company — and her 60.7 million Twitter followers. 

The Analyst

Stifel analyst Chris O’Cull upgraded Jack in the Box from Hold to Buy and raised the price target from $85 to $95.

The Thesis

Jack in the Box is taking advantage of what Stifel views is a valuation dislocation caused by investor uncertainty during the period the company went through a strategic review process — and concerns the long-term guidance would need to be revised lower given recent system sales performance, O'Cull said in the Sunday upgrade note. (See his track record here.) 

Jack in the Box’s valuation is much lower than Wendys Co WEN, despite similar levels of same-restaurant sales growth and margin performance, the analyst said. 

“We believe investor sentiment is overly-cautious towards JACK’s growth prospects, setting the stage for valuation improvement as the company demonstrates better (same-restaurant-sales) and operating performance in upcoming quarters." 

The assumption that the company’s valuation multiple improves to 14x and EBITDA grows roughly 4 percent in the next two years implies 35-percent upside, O'Cull said. 

Jack in the Box has underperformed the Stifel Restaurant Index this year at 5-percent vs. 11-percent growth year-to-date. 

The company recently said that in the first four weeks of the third quarter, same-restaurant-sales increased by more than 2 percent, the analyst said. 

Low expectations and cautious sentiment could serve as an opportunity for Jack in the Box investors, O'Cull said.

Through using a combination of debt proceeds and free cash flow, the analyst estimates the company could repurchase about 12-14 percent of its outstanding shares in the next year. 

“Now the company has removed the ‘special situation’ label assigned to the stock by many investors, we believe it will be more likely that value investors will be evaluating shares.”

Price Action

Jack in the Box shares were down 0.24 percent at $81.97 at the time of publication Monday. 

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Photo by Billy Hathorn/Wikimedia.