Breakout

Jack in the Box shares apparently still aren't expensive

Breakout

Part unapologetic fast-food operator, part fast-casual eatery, Jack in the Box (JACK) has rewarded its shareholders mightily of late.

The San Diego-based hamburger seller is a somewhat quirky shop with a surprisingly diverse menu. Along with its burgers, it has tacos, egg rolls, day-long breakfast and even some offerings on the lighter side, including egg whites and salads.

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It also has a stock that's climbed 182% since the start of 2012. In 2014, it's posting an 18.5% gain.

For those in the 21 states where Jack in the Box stores are located, a rather bizarre smiley-faced mascot named (what else?) Jack is likely what comes to mind, not trading prices. The chain's mythical founder is known best for appearing in ads that are always humorous  and sometimes test the boundaries of what's socially acceptable. With themes that seem to allude to sexual harassment and marijuana-induced munchies, they certainly aren't ads you'd see from the Big Three burger sellers.

The tastefulness of such marketing can be debated. And so can the stock price, because it's fair to ask whether it's gotten pricey as a result of a rally now in its third year. After falling along with most names amid the financial crisis, Jack in the Box posted annual declines in 2008, 2009 and 2011. The outlier up year, 2010, saw a 7.4% gain, trailing the market. Then, two years ago, it took off, surging 36.8%. In 2013 it doubled that, rising 74.9% and surpassing the 54% average gain among restaurants tracked by Yahoo Finance. In '14, it's outpacing its primary publicly traded competitors.

Notably, the rally has persisted even as the Fidelity Low Priced Stock Fund, the largest mutual fund owner, has been selling shares for months, FactSet data show. It still owns 6.1% of the stock, but that's significantly below the peak.

Jack in the Box isn't simply climbing by accident. It's added a dividend, yielding 1.4%, and it's changed chief executives, transitioning from one company veteran (Linda Lang) to another (Leonard Comma). Investors have bought into the better cost structure from its major refranchising effort, the diversity of two extensive brands and its earnings prospects. It hasn't hurt that Jack in the Box is less discussed in the ongoing national debates about fast-food quality and worker pay, despite its owning and franchising nearly 3,000 restaurants.

Still, with shares fetching a sizable premium to their normal levels, it has to be asked if the past advance will work against it in the near term, and if the good news is largely accounted for.

Few doubters

Wall Street observers certainly aren't deterred. Analysts have a combination of buy and hold ratings on the stock, but not one has had a sell opinion on it in a year. The average price target is $63, 10 cents above the record high of $62.90 from March, according to FactSet. These days, the stock is around $59, about 7% from the level analysts have set.

For contrarians among us, that's probably enough reason to flee, especially with the Fidelity fund paring its holdings. But betting against it has been a losing proposition, and short sellers aren't inclined to chance it. Short interest has increased since the end of February, though it still totals only 2% of the float. At 843,000 shares, that's actually down 18% from last June.

One might think shorts would be a bit bolder. Currently, the stock's forward price-to-earnings ratio is 22.6, well above the 15.1 that's been the norm in the past five years. The trailing P/E is similarly high, at 39 vs. 21.3. Here, however, Jack in the Box isn't alone, and that's providing  room to stay aloft. Competitors including Burger King (BKW), Sonic (SONC) and McDonald's (MCD) are also ahead of their usual multiples, and the market, of course, continues to advance.

Where Jack does stand out is the fact that it's gotten further beyond that average than others. Also, a number of additional standard valuation measures, from price/earnings-to-growth and enterprise value-to-sales ratios, are well in excess of what's generally been seen. Caution would seem to be the better course, but again, because of the elevated values elsewhere, it's easier to see the market taking down all these burger stocks simultaneously rather than Jack in the Box individually, unless some unusually negative event occurs.

Thus far it hasn't, although one did 21 years ago. For some people, the Jack in the Box name may be forever linked to a deadly 1993 E. coli contamination that put the company in the news for the last reason it would want. Yet the chain continued on. It established a food-safety program, expanded locations, and in more recent years turned from a company that owned most of its restaurants to one that franchises the great majority. The refranchising strategy continues, something investors applaud, as it means the corporation can count on franchise owners to take on a large percentage of overall store operating costs.

About a decade ago, it took a step that may ultimately prove to be the best of all, acquiring Qdoba Mexican Grill, a chain similar to market favorite Chipotle (CMG). Qdoba made up 21% of last year's $1.5 billion in revenue for Jack in the Box, and at the end of fiscal 2013, it had 615 restaurants in 46 states, about a quarter of the 2,251 locations for Jack in the Box-branded stores.

It's also where growth has more upside, and it's an offset to the competitive stress Jack in the Box stores will face for all time in the fast food burger area. Though some poorly performing units have been closed recently, the company believes it can get to about 2,000 Qdoba locations.

Whether the stock can keep benefiting is another matter altogether. Investors just have to decide if this odd restaurant chain has enough to continue supporting a soaring stock.

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