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Jack in the Box Inc. Message Board

  • john.heil2 john.heil2 May 19, 2011 1:37 PM Flag

    Increased earnings estimate

    I just got off the conference call which confirmed my opinion of yesterday that it would be an upbeat discussion. Having reworked my own model of operating results for fiscal 2012 ending about October 1, 2012, I am now estimating the company earns a minimum of $2.00-$2.10 a share. I come to this number given four bits of new information:

    1. Comps should continue to improve modestly over the next 18 months, perhaps an easy comparison up 3.0%-3.5% for the upcoming fiscal year, to include a recent 1.5% price increase.

    2. There will be approximately .25 to .35 cents of expenses automatically factored out of next year's number, including no more incentives to franchisees to re-image on an expedited basis which could be as high as a .14 cents decrease.

    3. The company has taken a much more aggressive stance in its share buyback program. The timing of this really surprised me, with a second $100. million buyback authorized by the board of directors only last week. I think they start to utilize those funds, by borrowing against their line of credit, as soon as the prior authorization is completed, that is, the remaining $25 million of an original $100 million. Indeed, I would not be surprised if that last amount has already been utilized given the stock weakness over the past three weeks. Remember, their kind of buyback program is implemented on a regular basis, tied to weakness in the stock. Therefore, legally, there is no restriction or period in which they cannot buy shares around any particular news event. (excepting perhaps a 48 hour band around some major announcement)

    4. The Qdoba operations are starting to have a more meaningful impact on overall company margins. How apparent that they want this to become an equally powerful generator of income as the flagship brand over the next five years or so. Of course I am betting that they spinoff Qdoba which really enhances this JACK investment in my opinion.

    Near term the stock probably goes to around $23. given the large short interest and new momentum off the low of $20. Later this year, probably late summer, I can see $25 given no major stock market setback. Over the next two years, $30. is a legitimate target price. This assumes, of course, no spinoff of Qdoba or any Private Equity buyout.

    Big J in L.A. (retired security analyst, The Foristall Co., member The Los Angeles Society of Security Analysts. I followed the restaurant, lodging and gaming industries over a fourteen year period.)

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    • A few quick questions on your earnings estimates. Of the 2.00-2.10, how much is due to selling of franchises? Next how much of your estimate is from decreased shares? Your estimate maybe a little easier to understand if you stated it in net income as compared to EPS.

      On a going forward basis what do you think earnings will be when the sales of franchises is complete. Also once they have completed the sale of franchises, how many shares will be outstanding?

      • 3 Replies to thetallulah
      • Those are good questions. I state the number as an EPS figure because that is the common metric for gauging a stock's worth compared to others. I have not broken out refranchising income for fiscal 2012 because it is not pertinent to valuation levels at this time. Because the company has now indicated it intends to be much more aggressive in buying back its shares in the open market, I would estimate that when the refranchising program ends there will be less than 40 million shares outstanding, including diluted shares. That is a major factor in looking ahead. This is what the Credit Suisse analyst missed in calculating his future EPS numbers. His breakdown had over 46 million shares outstanding at such time, not the 40 million I expect. It is a very pragmatic consideration (transition) via refranchising, going from a relatively unstable earnings flow to more stable, plus the fact EPS will benefit from the buybacks. That is about .25 cents more per share than the C.S. analyst figured. Additionally,I do not think he factored in the effect of a more aggressive Qdoba expansion program either, and probably is light on his estimate of comp expansion. He made a big thing about commodity costs this year, but that is already ancient history in the perspective of the stock market which always discounts 9-12 months ahead. That is one reason the stock went up today, it simply ignored the poor second quarter number. Many of these younger analysts just don't get it when it comes to the stock market functioning as a discounting mechanism. They are always fighting last year's battles, while new war clouds gather for the battles ahead. And this new battle JACK management will surely win as it may get even more aggressive than I anticipate in buying back its shares.

        Big J in L.A.

      • Those are good questions. I state the number as an EPS figure because that is the common metric for gauging a stock's worth compared to others. I have not broken out refranchising income for fiscal 2012 because it is not pertinent to valuation levels at this time. Because the company has now indicated it intends to be much more aggressive in buying back its shares in the open market, I would estimate that when the refranchising program ends there will be less than 40 million shares outstanding, including diluted shares. That is a major factor in looking ahead. This is what the Credit Suisse analyst missed in calculating his future EPS numbers. His breakdown had over 46 million shares outstanding at such time, not the 40 million I expect. It is a very pragmatic consideration (transition) via refranchising, going from a relatively unstable earnings flow to more stable, plus the fact EPS will benefit from the buybacks. That is about .25 cents more per share than the C.S. analyst figured. Additionally,I do not think he factored in the effect of a more aggressive Qdoba expansion program either, and probably is light on his estimate of comp expansion. He made a big thing about commodity costs this year, but that is already ancient history in the perspective of the stock market which always discounts 9-12 months ahead. That is one reason the stock went up today, it simply ignored the poor second quarter number. Many of these younger analysts just don't get it when it comes to the stock market functioning as a discounting mechanism. They are always fighting last year's battles, while new war clouds gather for the battles ahead. And this new battle JACK management will surely win as it may get even more aggressive than I anticipate in buying back its shares.

        Big J in L.A.

      • Those are good questions. I state the number as an EPS figure because that is the common metric for gauging a stock's worth compared to others. I have not broken out refranchising income for fiscal 2012 because it is not pertinent to valuation levels at this time. Because the company has now indicated it intends to be much more aggressive in buying back its shares in the open market, I would estimate that when the refranchising program ends there will be less than 40 million shares outstanding, including diluted shares. That is a major factor in looking ahead. This is what the Credit Suise analyst missed in calculating his future EPS numbers. His breakdown had over 46 million shares outstanding at such time, not the less than 40 million I expect. It is a very pragmatic approach (transition)via refranchising, going from a relatively unstable earnings flow to more stable, plus the fact EPS will benefit from the buybacks given that proceeds from refranchising will increase in the next couple years when larger deals in more lucrative markets are completed. By my calculation that is about .27 cents more per share looking forward than the C.S. analyst figured. Additionally,I do not think he factored in the effect of a more aggressive Qdoba expansion program either, which we are now realizing, and probably is light on his estimate of comp expansion. I reside in L.A. and things are starting to hum here again. This being JACK's largest market it gives me a good insight to day to day operations when speaking with managers. That C.S. analyst made a big thing about higher commodity costs this year, but that is already ancient history in the perspective of the stock market which always discounts 9-12 months ahead. That is one reason the stock went up today, it simply ignored the poor second quarter number. Many of these younger analysts just don't get it when it comes to the stock market functioning as a discounting mechanism. They are always fighting last year's battles, while new war clouds gather for the battles ahead. And that new battle JACK management will surely win as it may get even more aggressive than I anticipate in buying back its shares over the next three years.

        One final thing. That was a lot of stock changing hands today. Sure, some of it was short covering, but could it be that some private equity group now got the final confirmation that things were turning around at JACK's. Who knows? I only know that it would be an exciting time for anyone smart enough to have positioned the stock with the possibility of buying the company on the cheap, or, making a killing if a White Knight should appear on the scene after they have established their 9.9% position.

        Big J in L.A. (retired security analyst)

 
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