Contest Winner Ryan Fusaro from LionEye Capital pitches his long thesis on Jack in the Box Inc. (NASDAQ:JACK) as the final speaker at the 2012 Value Investing Congress.
Ryan thinks Jack in the Box Inc. (NASDAQ:JACK) has a lot in common with MCD from 2005, an idea that Bill Ackman pitched at the 2006 Value Investing Congress. JACK is in the process of shifting business models away from a low-margin restaurant operations towards a higher-margin franchisor operation. Jack in the Box’s transformation is nearly complete, with the vast majority of location now owned by franchisees. The stable earnings and lower capex requirements make the franchisor business model much more attractive to investors. As a result, franchisor businesses command a higher valuation multiple in the market.
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Embedded within Jack in the Box Inc. (NASDAQ:JACK) is Qdoba, a fast casual Mexican chain that is growing rapidly but not receiving the valuation that it deserves. Qdoba is largely overlooked or ignored by investors historically, but deserves to trade at the higher multiples of comparable fast casual competitors.
Fusaro believes Jack in the Box capital spending is misunderstood by the market. In the last few years the entire JIB store base was refreshed. This $250mm refresh program is now complete, and capex should return to more normalized levels. Going forward the majority of capex will be directed towards continued growth of the Qdoba brand.
Additionally Jack in the Box Inc. (NASDAQ:JACK) owns significant real estate assets which are overlooked by investors. With over 1,400 properties owned by Jack and leased to franchisees, Fusaro estimates a steady cash flow of $80mm+ from the real estate division that should be valued using the cap rate method.
On a sum of the parts basis, Fusaro believes JACK is worth $45 – $50 which provides 70%+ upside from the current price. The key catalyst for realizing the value is spinning off the Qdoba brand or realizing value in the real estate through a REIT. This would simplify the company, and provide more of a pure play investment.