Jack In The Box (NASDAQ: JACK) is a turn-around story that has legs but it is not one without risks. The latest hurdle, the unusual addition of Del Taco to the fold, was met with skepticism from the market but the institutions were not swayed in their faith in this company. The institutions purchased shares in an amount worth 24% of the current market cap over the last year bringing their total holdings to nearly 100% of the company. This is a very significant figure and one that implies higher prices are in store for this stock and that is on top of the 2.0% dividend yield. Add in the slightly-more-than 1.0% the insiders own and it is easy to see that this is one tightly held issue and there is yet another catalyst for higher prices as well.
The short-interest in Jack in the Box was sitting at over 10% coming into the month of August and it looks like a short-covering rally is already underway if it isn’t an outright short-squeeze. The stock is up more than 13% in the two days since the report was released and the bias is most definitely upward. Not only are the technicals in favor of higher prices but the analyst are in support of the stock as well and they could help propel it to new highs.
The analyst's sentiment is still only a Hold but it is firming in the wake of the Q3 report as is the consensus price target. There have been at least 8 commentaries since the Q3 report was released and they all include favorable price-target adjustments. The 1 price target reduction has the stock trading at $100 compared to the $89.50 consensus target and the 7 increases have a narrow consensus in line with the broader consensus. The takeaway is the consensus figure implies about 5.5% of upside and should trend higher over the next two quarters assuming the company is able to continue executing its strategy in the final quarter of the year and into 2023.
Jack in the Box Has Mixed Quarter But Strong Results
Jack in the Box had a mixed quarter in terms of revenue and earnings relative to the analyst's expectations but there are mitigating factors to be aware of. While the revenue beat the analyst's consensus earnings did not because of a larger-than-expected decline in the margins. The margins declined on a 16.8% increase in commodity costs and a 13.2% increase in labor costs which were expected, and an increase in costs associated with new and emerging Jack in the Box markets which were more than expected.
Comparatively, Wendy’s (NYSE: WEN) just guided its margins higher and the same is expected from McDonald’s (NYSE: MCD) but both of them have the benefits of scale and are not impeded by turnaround efforts. Yum! Brands, perhaps a closer comparison, also reported strength on an ex-Russia basis and it is on track for growth. The takeaway for Jack in the Box investors is that earnings remain strong and the company is on track to improve margin (as part of the larger growth story) but it may a quarter or two before the improvements are seen. Longer-term, Jack in the Box also has a larger opportunity for growth because it is the smallest of the three, as it expands in the US and eventually enters major International markets.
As far as revenue goes, the company posted a 47.8% increase in net revenue due to the addition of Del Taco which is where most of the current-quarter strengths were seen. On a segment basis, a -1.4% decline in Jack comps was offset by a 3.3% increase in Del Taco comps and both are up 10% or so in the two-year comparisons. Looking forward, the company is expecting to see growth in Q4 but narrowed the margin outlook by a full percentage point. The takeaway is that cash flow and earnings remain strong, the dividend is safe, and share repurchases are expected in Q4. The company did not buy back any shares during Q3 but is planning $25 million in repos in Q4.
The Technical Outlook: Jack in the Box, Pop Goes The Weasel
Price action in Jack in the Box hit a bottom with its Q2 release three months ago and entered a full reversal even before the Q3 announcement and now the move is going ballistic. Shares are up double-digits in the wake of the report and forming two strong white candles that could easily turn into a Three White Soldiers continuation pattern. The Three White Soldiers shows three consecutive days of strong, above-average buying and is in indicative of high commitment within the market. If this pattern plays out, a move up to the $95 level is doable in the near-term and longer-term targets are closer to the $120 level. If not, this stock could return to earth or enter a trading range until more news comes out.