Baird said Jack in the Box Inc. (NASDAQ: JACK) could sell Qdoba business, which might yield cash proceeds near $400 million and would command a valuation above the current level for the combined business. Such a move would allow the company to focus on its core Jack In The Box brand.
“[W]hile we remain cautiously optimistic that Qdoba can return to positive operating momentum and achieve solid growth longer term, we also see a scenario in which the company could sell Qdoba at a fairly modest valuation multiple (e.g., EV/EBITDA near 6-7X) and create near-term value for shareholders,” analyst David Tarantino wrote in a note.
Justification For Sale Of Qdoba
On the valuation front, Tarantino noted JACK's NTM EV/EBITDA of 10.6X is solidly below the 13.0X average for highly franchised peers. He believes the Qdoba business has become an anchor on the valuation metrics being applied to the overall JACK business.
The analyst said Qdoba could be worth much more than 6-7x if management is successful in turning around the unit’s fundamentals. However, if Qdoba's performance does not improve in upcoming quarters, Tarantino said his analysis suggests shareholders could benefit from a sale of the business over a refranchising strategy.
“Assuming 13.0X current NTM EBITDA for a stand-alone JIB business (consistent with current mean for peers) following a Qdoba sale at 6-7X would translate to an estimated combined equity value 15% above the current level for JACK,” Tarantino added.
Tarantino has an Outperform rating on JACK shares, with a price target of $125.
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