Why Jack in the Box Keeps Surprising

Nowadays one share of Jack in the Box (NASDAQ:JACK) is worth a lot of Sourdough Jack and Jumbo Jack burgers. The quick-service restaurant (QSR) chain has delivered some jumbo returns for investors that were willing to place an order when the stock dipped below $20.

Despite the unusual operating environment of the past year, Jack in the Box has strung together a series of earnings beats. That pattern continued this week when the company topped earnings expectations for the fourth straight time.

The timing of the release was unfortunate though, as the market was firmly in selloff mode. Rather than pop higher as in past quarters, Jack in the Box recoiled and now sits 10% below its peak. Is the correction an opportunity to add some burgers and fries to the portfolio?

How Did Jack in the Box Perform in Q1 2021?

For the first quarter of fiscal 2021, Jack in the Box recorded revenue of $257.2 million while the Street was looking for $250.9 million. Apparently, a lot of customers wanted fries with that. Even though transaction volumes declined 5%, same store sales jumped 15% due to a 20% higher average check. The company noted government stimulus checks as a reason behind the strong sales.

The adjusted earnings per share number was just as impressive. It came in at $1.48 compared to the analyst consensus of $1.29. The bottom-line performance marked the fourth straight time that Jack in the Box has handily topped earnings expectations.

Another highlight of the report was a 10% hike in the quarterly dividend to $0.44. This brings the forward dividend yield up to 1.6% which is above the industry average.

As has been commonplace this earnings season, management commented on inflation expectations. It sees commodity cost inflation of approximately 3% and labor cost inflation of 5% to 6%. This spooked some investors.

But with the Fed labeling the current inflation bump as "transitory", easing supply chain pressures could put downward pressure on commodity costs. This along with a return to normal transaction volumes should help Jack in the Box have a solid year of earnings growth. Analysts are currently forecasting that profits will be up 39% in 2021 and normalize to more industry-like growth in the single digits.

Where Does Jack and the Box Go from Here?

As the economy transitions to its new normal, Jack in the Box will likely maintain elements of the pandemic business model while phasing in parts of its pre-COVID growth blueprint.

This means that delivery will probably remain a significant part of the business even as restrictions are lifted. Whether due to safety concerns or a growing appetite for convenience, many people will continue to lean on Jack's delivery connections with DoorDash, GrubHub, and Uber Eats.

Drive-thru lanes are also expected to be a staple of our fast food lives. Drive-thru sales account for over 70% of Jack in the Box sales. And if it ain't broke don't fix it. The company is planning to invest more in its drive thru channel including its digital menu boards to make for a more appealing, modern customer experience.

Aside from further enhancements to its mobile platform, Jack in the Box will also look for growth the old-fashioned way—by building new locations. Last quarter it added three "Boxes" and plans to open as many as 22 more this year. More than 90% of its restaurants are franchised. This is an attractive model because franchising typically leads to lower SG&A expenses and better profitability.

 Is Jack in the Box Stock a Buy?

Jack in the Box has done a remarkable job of finding ways to grow during COVID-19. Revenues grew nearly 8% last year and are expected to be up 9% this year. Considering that the company has been able to grow despite limited dining room traffic, it now has a solid foundation to build from. At some point, pent-up travelers and returning office workers will bring transaction volumes to pre-pandemic levels and beyond.

Since the first-quarter report, three sell-side firms have reiterated their 'buy' ratings on Jack in the Box with price targets ranging from $135 to $140. This is some pretty good upside for a simple yet very popular burger joint.

With the recent downturn, Jack in the Box is trading around 18x forward earnings. This is lower than the average forward earnings multiple of its peer group and below the S&P 500's forward P/E of 22x. This suggests the stock belongs on the value menu.

From a technical analysis perspective, the pullback to the 50-day moving average was in above-average volume which isn't ideal. There may be a bit more downside due to the broader market weakness. But if the stock starts to stray far from the 50-day and the lower Bollinger band, this would be a good buy opportunity as such dips have recently been.

For now, Jack in the Box will probably ebb and flow with the jittery market. But as the market rebounds, investors will once again become interested in companies that are consistently outperforming. When this happens, look for Jack in the Box to spring back up.