I have spent this weekend analyzing the offer for CKE Restaurants, JACK's principal competitor, and the more I look at the situation the more excited I get about JACK. First of all that offer is still open and probably is either topped or sweetened by the current prospective buyer. This keeps JACK in play also because a higher price for CKR increases the perceived value of JACK. This was bound to happen as I have been suggesting all along on these posts of mine. In a depressed economy and industry conditions, costs are cut and companies tend to run lean and mean. In other words, they become very efficient operators during tough times. Those that can show any kind of acceptable earnings become more and more of a value as their stock prices decline. This is what happened to CKR as a private equity group suddenly woke up to the fact they can literally steal the company for 14X depressed earnings at the very bottom of the recession. Importantly, that affords JACK a nice floor under its share price because of the possibility somewhere along the line of perhaps a hostile takeover or sale of the company. Calling attention to the group this way did us a favor and I thank CKR for playing the rabbit in this case. Of course JACK still sells at the lowest PE for any of the restaurant stocks I follow (almost 30 companies now) and it has considerable upside potential over the next two years on that basis alone. Any recovery benefits JACK more than others because they have a high percentage of company owned units. Two other factors come in for special consideration. The company is committed to a major share buyback this year. They will be competing for a dwindling number of shares with those speculators now attuned to the CKR situation as it redounds to JACK's benefit or image enhancement. Finally, please keep in mind Qdoba! This is a real wildcard for JACK because it will eventually be spunoff ala the McDonalds Chipotle spinoff. Because of JACK's ridiculously low PE ratio (given the 5 year growth outlook), you are getting that wholly owned subsidiary for virtually nothing. And they are equal to or better than Chipotle in product offerings and field management. Bottom line, I am now comfortable with these shares up to the 25.-26. area sometime this year. At that point they become a "hold" for better things in 2011, but certainly not a sale. I am in this baby for the long haul and foresee nothing but good things once this economy rights itself which is inevitable. Nobody has suspended the business cycle, and we can expect a nice rebound in business conditions over the next two years. My very best to you, Big J in L.A.
Carl's is Jack's most similarly situated competitor but not its primary competitor.
Presently, Jack's primary competitors are those in the space of significant price discounters including the likes of McDonalds. Although both Jack and Carls offer dollar menu items, both are still more of premium product providers which I feel are being hit the hardest as patrons trade down in these bad times.
Good point. Several analysts this past week compared JACK to CKR as the closest fit in terms of size and food offerings, as well as marketing given a loosely connected geographical area at least in the West and South. To a man they seemed to suggest JACK is the more desirable company fundamentally, on the basis of their balance sheet and also in terms of who is the better catch by an acquirer. Also, in my case residing in L.A. gives me insight to these two operators. Los Angeles has by far the most Carl's units and the most JACK units. I see this head to head battle all the time. I believe JACK is starting to get the upper hand with new product introductions that serve a somewhat broader consumer set. Now I anxiously await that new coffee introduction which should "jack" up their breakfast business. Big J in L.A.