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On a day when hyper-growth tech stocks Roku (NASDAQ: ROKU ) and Yelp (NASDAQ: YELP ) reported strong numbers and shot up more than 20%, it is easy for casual market observers to look over Jack in the Box's (NASDAQ: JACK ) third quarter earnings report. But, trust me, this isn't a report you want to look over. JACK stock is really heating up.
Jack in the Box reported a very strong double-beat quarter wherein comparable sales growth finally came back into positive territory after a multi-quarter stint below zero. Management also sounded a bullish tone about positive comparable sales growth continuing next quarter. Overall, Jack in the Box stock shot up 8% in response to the strong report.
The Q3 report, though, could mean much more than just an 8% post-earnings pop in the stock. This could be the beginning of a multi-year rally in Jack in the Box which takes the stock price to $140 or higher over the next 4-5 years.
Here's a deeper look.
The Quarter Was Good
Jack in the Box's third quarter numbers were good.
Comparable sales rose 0.5%, ending a multi-quarter streak of negative comparable sales growth. Granted, traffic was still down 2% and the 0.5% comp lagged comparable sales growth across the whole QSR sandwich segment by 2 percentage points. But, inflection from negative to positive comparable sales is a big step forward for Jack in the Box.
Moreover, the company's re-franchising initiatives continue to boost margins. Restaurant-level EBITDA margins were up 430 basis points in the quarter.
Going forward, this era of positive comparable sales growth and margin expansion is expected to persist. Comparable sales are expected to rise roughly 1.5% in the fourth quarter, which would mark a huge turnaround from -0.2% comparable sales growth at the start of fiscal 2018.
Clearly, things are getting better at Jack in the Box. Re-franchising continues to push margins higher, while comparable sales growth trends are finally starting to improve.
Time for a Rally
In the big picture, Jack in the Box has been stuck in neutral ever since 2015. During that stretch, re-franchising initiatives have made for a confusing financial picture while decelerating comparable sales growth (comps went from up 6.2% in 2015 to projected up 0.25% this year) pointed to deteriorating unit economics.
But, the franchise mix at Jack in the Box is now 94%, meaning that the bulk of re-franchising is in the rear-view mirror. Plus, comparable sales growth is now accelerating higher, not decelerating downward. Thus, the two big headwinds which have afflicted JACK stock over the past three years are now turning into tailwinds.
That means that it could be time for a multi-year rally in Jack in the Box stock.
Fundamentals Support $140 Long-Term Price Target
Over the next several years, growth at Jack in the Box will be driven by two things:
- Store remodels improving brand image
- Menu innovations driving higher traffic
On the store remodel front, Jack in the Box plans to upgrade 80% of its stores by fiscal 2021. These upgrades include entire store re-models and improved drive thru experiences. In sum, these mass upgrades should improve Jack in the Box's brand image, drive higher traffic, and allow for Jack in the Box to slightly increase prices.
On the menu innovations front, Jack in the Box continues to leverage a unique marketing strategy to develop equally unique offerings, such as the recent sauce and loaded fries.
Unique menu innovations like this will continue over the next several years, and should keep traffic trends healthy going forward.
Thus, over the next five years, it is quite likely that store remodels and menu innovations re-accelerate comparable sales growth, and that new sales growth will come at a particularly high margin thanks to a 94% franchise mix.
From this perspective, management's long-term guidance calling for $175 million in free cash flow by 2022 (versus just over $100 million last year) seems quite achievable.
Assuming share buybacks persist, that will easily translate into $7 or more in free cash flow per share by fiscal 2022. According to YCharts historical data, a very conservative assumption for JACK stock is a 5% free cash flow yield (or 20X free cash multiple). A 20X free cash multiple of $7 implies a fiscal 2022 price target of $140.
Bottom Line on JACK Stock
Jack in the Box stock has been stuck in neutral for three-plus years thanks to confusion regarding re-franchising and decelerating comparable sales growth.
But, third quarter numbers could be an inflection point in that narrative. The company's re-franchising initiatives are now largely over, and comparable sales growth has re-accelerated into positive territory.
If comparable sales growth acceleration persists thanks to store remodels and menu innovations, JACK stock could trend towards $140 over the next 4-5 years.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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