Credit Suisse is the firm that was for the longest time the primary bull on JACK. They had some grandiose ideas as long as two to three years ago that JACK was going to earn mucho bucks in 2009 and 2010. Everybody thought their estimates way out of bounds on the upside. So they had to eat crow and change their viewpoint when reality dawned on them. Now there is a reverse perspective and I believe Credit Suisse has the lowest target price among the 15 analysts following JACK. So, they were wrong on the upside, and, I think they are clearly wrong on the downside.
But why? I read their report and did not find any reference either to the possibility of a private equity buyout or Qdoba spinoff. Maybe I missed it, but if indeed they overlooked mentioning these two possibilities that would be a major oversight in any analysis. Both are entirely feasible developments that could happen at any time. A second misconception, and this is true of most analysts following JACK, they are not giving enough credence to the effect of an ongoing shrink in the company's capitalization. This will be a major source of JACK growth in EPS in the decade ahead. Sure there will be leverage for JACK when the economy recovers, but the exciting thing is the free cash flow generated after 2011 when the capital improvement or re-imaging program is completed. Obviously, the lower the price of JACK shares, the more leverage from the share buyback program which has been averaging $100 million a year. Long term holders can be quite confident that EPS will improve dramatically from the cap shrink phenomenon over time.
Given these dynamics, and the Credit Suisse estimate for the fiscal year starting in October 2011 of $1.92 per share, at $20. to $21., you are getting by far the cheapest stock in the group (great downside protection as verified by the chart)with the very good possibility that either Qdoba will be spunoff or the company will be acquired by a private equity group. One independent analyst commented that he felt if Qdoba was spunoff ala Chipotle, within two years it would be valued higher than the remaining JACK operations. Any spinoff would be accompanied by an IPO which would raise a lot of cash to expand Qdoba, again, just like Chipotle did after McDonalds spun it off. So, in one sense, buy JACK today and get two companies for the price of one.
Regarding the private equity presence in the category, JACK is the next logical candidate based on a number of factors, including its strong balance sheet. Some private equity group could buy up to 10% of the stock on the cheap now, and then tender for the rest at $25. But then a White knight would likely come into the picture and the bidding could go to $27.- $28. If they chose to, the private equity group could then bow out and pocket a quick and cool $60. to $70. million on a virtual risk-free basis. "Money makes money," as the saying goes. Just ask Carl Ichan how that game is played. If I had the funds I would do this in a heart beat. And, of course, there is the other option of taking JACK private at $25. and selling it again five years from now which is even more appealing from the private equity perspective.
So whatever you do, do not suck into that vortex of an imperfect vision of this company's potential and future price action. Rely instead on your own God-given reasoning ability to see this situation clearly, rather than throw away your stock to some vulture out there at a price of $21. or less. That vulture may well turn out to be a swan identified as some private equity organization with smarts and faith in the reality of this situation.
Big J in L.A. (retired security analyst, The Foristall Co, members The Los Angeles Society of Security Analysts; I followed the lodging, gaming and restaurant industries for a period of 14 years)
Yeah,,,, if it continues to languish in this low range your position will continue to twist in the wind.
Can't really blame you when you ballyhoo a stock given what you have in play but still not buying.
Perhaps if you spent less time coming across as an overbearing & condescending expert that keeps restating his credentials every other post. Not gonna get too much traction with the rubes when they think you are trying to make a fast one at their expense.