This first link from MarketFolly contains the presentation from the winner of the Value Investors Congress contest whose presentation and analysis was a bull case for Jack in the Box.
The above analysis is actually the one I voted for in the contest as I thought it was the best, and the analysis he did in his article is actually what led me to research JACK as a possible investment for myself as he laid out a very good bull case for the company.
This second link is my analysis which is a bear case for Jack in the Box.
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We came to the same conclusions about future possibility which he counts on more than I like to. I generally only count in my analysis what I can see now and do not base my valuations on speculation of what could happen in the future.
Please feel free to leave comments on the two articles: Where I might have gone wrong, what I could have done better, etc. I would really appreciate your thoughts.
which aspect of his analysis do you find compelling?
The main thing I liked about it is the simplicity of the structure of it all. No unnecessary stuff clogging the pages and they are filled with only relevant information. I have been trying to model my work after similar simplicity.
As for his analysis I like the depth of the analysis while keeping things simple. He laid out a very good bull case hitting most relevant points in my opinion.
Now that I have done my own analysis on JACK I think he counts too much on things that might happen in the future instead of what is going on now, but that is only a difference on how we each approach our individual investments, which also led to our two completely different conclusions.
The only factual thing that I disagreed with is that I do not recall him even mentioning the companies huge amount of debt and total obligations, most of which are coming due within the next five years.
In my analysis and valuation, that was actually one of the main turning points that changed my analysis to a bear case for the company. I am a very conservative investor who plans to hold companies generally for years if not decades, except in special situations cases so that is a pretty important point to me. Again, that could just be that we approach our investment decisions differently.
What were your thoughts on his analysis?
I’ve laid out what I think of Jack in the comments here:
http://www.whopperinvestments.com/deliberate-practice-jack-analysis
I thought his analysis was effective in avoiding what matters. He chose to emphasize relative valuation, as though JACK and MCD or JACK and SONC are similar quality businesses, as though Qdoba is the equal of CMG.
Some questions not answered: what is normal maintenance capex? what is normal earning power? why treat real estate separately when it underpins Jbox’s earnings? Why are franchise selling prices decreasing over time? What will happen when SONC enters core Jbox territory? What happens to Qdoba when Taco Bell’s new-look stores & menus are done? All the important stuff is missing, basically.
Anyway, this is not unusual. It is the kind of analysis that Streeters like” an attempt to show something (apparently) hidden rather than to demonstrate value. IMO
I am definitely going to check out that page from Whopper’s site and read the analysis and discussion in the comments. By the way I didn’t know you were Red from some of the comments there, I love the stuff you talk about on his site and will definitely be checking out your blog and I am honored that you liked some of my work. Wish I would have known about your blog sooner so I could have been reading it over the past few months.
What you talked about in your reply were generally my main issues as well, especially after researching JACK for myself, as I think he concentrated too much on the future and was too optimistic, I don’t even remember any risks or negatives that he mentioned other than competition.
If you have some time I would really appreciate your critique on my JACK article, where I went wrong, what I could have done better, etc? I already know that I should have mentioned the same store sales growth which is between 1-3%.
You really helped me think better and more thoroughly about things after I posted some of my analysis on Whopper’s site and really loved the feedback you offered then. I think I have become a much better investor in a short amount of time with the help of your advice you previously offered and would very much appreciate any comments you might have about my current analysis.
Thank you in advance for any help you might offer.
“If you have some time I would really appreciate your critique on my JACK article, where I went wrong, what I could have done better, etc?”
Well, not a critique, exactly, but my thoughts:
1. You list JACK’s buybacks as a pro. Is it? Does it depend on the price paid vs. intrinsic value?
2. You wrote: “If JACK management decides to sell or spin off Qdoba it would send the stock price higher.” How can that be, if “Qdoba is a high growth asset that is also currently more profitable than Jack in the box” is also true?
3. You focus on margins — for example Selling restaurants to franchisees will get JACK into the higher margin business of collecting royalty and franchise fees” — whereas what matters, the ONLY thing that matters, is the return on invested capital. The question is, What does the transition to a fully franchised model for JACK’s ROIC?
4. You start a thought about the off-balance sheet liabilities (esp leases) but don’t carry it over into the ROIC analysis. Those lease liabilities must be offset by operating assets, which means that the IC in ROIC is (much) higher than advertised, which, in turn, means that the ROIC is much lower than advertised.
4. I would focus most of my attention to the competitive position of the business. Why do people eat at Jbox & Qdoba rather than Sonic, Chipotle Taco Bell or McDonalds? What happens is Sonic saturates Jbox territory? What would happen if Qdoba tries to compete head-on with CMG? Can Jbox or Qdoba raise prices? Why would a potential franchisee choose JBOX over other hamburger brands? etc. The numbers are best seen in the light of this kind of thinking — as an afterword to the analysis rather than as a prompt to it. Comparing same store sales, working capital requirements, fixed assets employed (including leased assets), etc between these brands will add more real, analytical insight as to if and why JACK earns returns above its cost of capital. (In my view, it doesn’t, which is why it’s not worth even the reproduction cost of its assets).
The one overriding strength of your analysis is that you looked at it objectively and came to the conclusion that any value is not obvious. That’s 95% of the work, IMO. Justifying an investment requires that the value inherent to a stock be obvious, unambiguous, and significant.
Wow, thank you for your feedback I truly appreciate it. I think the only way to get truly better is to find your faults and try to fix them as soon as possible, so thank you for helping me with my faults.
1. Very good point, and I will think about the price paid vs. intrinsic value aspects of buybacks in the future.
2. I meant more in the short term since almost every spin off leads to short term price appreciation, but agree that I should have been more specific.
3 & 4. Analyzing, adjusting, and evaluating ROIC is one of the aspects I know I need to learn a lot more about as I have only recently started looking seriously at ROIC and how it is measured, what effects it going up and down, etc. Do you have any books or website suggestions that go over how to analyze, properly adjust, and evaluate ROIC on a deeper level? Now that I know you have a blog I have started going over all your posts from the beginning and it looks like I can learn a lot about the stuff you bring up. Amazing information on your site and it is now definitely on my daily reading list.
5. I do not see any kind of competitive advantages within either Jack in the Box or Qdoba. In my opinion if Qdoba were to try and compete with Chipotle head to head they would get crushed because CMG does appear to have at least minor competitive advantages, cheaper cost structure, and better profitability. As for the Jack in the Box restaurants I cannot say for sure why people would prefer to go to its burger joints instead of BK, Sonic, McDonald’s, etc as I have never been to a Jack in the Box. I do feel comfortable saying that for other than the simple fact that they might want to have a Jack in the Box where they live or sentimental reasons, maybe they have special memories of going to Jack in the Box when they were younger for example, I do not know why people would rather franchise a Jack in the Box restaurant as it is less profitable than the other companies appear to be after my analysis. As to the more technical things in #5, working capital and the like, are all stuff I also need to get better at analyzing along with ROIC, also stuff that looks like I can learn from your site.
I also agree with your very last sentence as well because if I am not comfortable with something going on at a company after analyzing it, I do not invest in it. If I do find the company interesting I will continue to look at it though as a possible investment in the future if things get fixed. Also thank you for your kind words.
Thank you again very much for taking the time to give me some feedback, I really appreciate it. Let me know if I can return the favor some time.
I unreservedly recommend this book for a reasonably thorough & common sense approach to valuation:
http://www.amazon.com/dp/0470424656/?tag=hyprod-20&hvadid=15466837299&hvpos=1o1&hvexid=&hvnetw=g&hvrand=20222115641884391239&hvpone=&hvptwo=&hvqmt=&ref=asc_df_0470424656
Thanks for the book tip. I actually read it awhile ago and didn’t care too much for it because of its concentration on DCF valuation which I do not like. I will take another look at it though for some of the specific information your talked about in the above comment. Thanks again.