Jack in the Box, Inc. (JACK)

[TRUISM]

Jack In The Box Up On Possible Qdoba Spinoff
Published: September 30, 2014 at 9:43 am EST--By: George Zack

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Jack in the Box traded higher yesterday, on the back of speculation related to a possible spin-off of its fast-casual restaurant chain, Qdoba Mexican Grill Chain


Jack in the Box Inc. (JACK) stock jumped 3% higher yesterday, on the back of speculation by Christopher O'Cull, an analyst at KeyBanc Capital Markets, that the food retailer will be spinning off its Qdoba Mexican Grill chain. He further reiterated his Buy rating on the stock and revised the target price from $68 to $80, representing an upside potential of 18% from the last closing price of $68.67.

Christopher O'Cull further mentioned that although the management did not state any plans of a possible spinoff of Qdoba in a recent meeting, he still expects the management to reconsider the possible spinoff proposal to monetize Qdoba's value. He believes the true value is not adequately represented in the company’s current stock price, due to the worsening performance of the company’s fast-food chain, Jack In The Box. Over three-fourth of the revenue is being streamed in by the company’s struggling fast-food chain, which might further justify Christopher O'Cull's stance.

The analyst further elaborated that a complete spinoff of the fast-casual Mexican chain might be really challenging, given the huge cost of disintegration. Instead, the company could sell off a minority stake of Qdoba to shareholders through an initial public offer (IPO) to help erode the discount, being reflected in the company’s stock price.

The company’s namesake fast-food chain has been struggling recently, due to growing health awareness amongst US consumers because of which they no longer prefer to consume fast-food with high calories; instead, they prefer to consume low-calorie, healthy food being offered by fast-casual restaurants.

During the last quarter, company’s fast-food chain posted comparable sales growth of 2.4%, up from 0.1% from comparable sales growth posted in the same quarter on the back of breakfast and late night offerings. At the same time, Qdoba posted comparable sales growth of 7.5%, up from 1.3% growth recorded in the comparable quarter last year.

The fast-food chain posted a year-over-year (YoY) revenue decline of 4.8, while Qdoba recorded a 14.4% YoY surge in its revenues, during the last quarter. As of the end of the last quarter, the company reported goodwill of $149.1 million, out of which $100.6 million was attributed to Qdoba.

The company’s stock currently trades at 12-month forward price-to-earnings (P/E) multiple of 27.8x, much lower than that of Chipotle Mexican Grill, Inc. (CMG) which trades at 12-month forward P/E multiple of 48.4x. The spinoff proposal would not only relieve pressure on the company’s stock price, but at the same time enable Qdoba to compete more efficiently with its rival fast-casual restaurant chains.




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