Just Boring Burgers? You Don’t Know JACK

by Charles Sizemore | October 11, 2012 2:04 pm

I want to look at an intriguing opportunity in a rather boring fast food chain: Jack in the Box (NASDAQ:JACK[1]).

I’m not making Jack in the Box an official recommendation of the Sizemore Investment Letter[2] for two reasons. First off, it doesn’t fit any of our current macro themes; it is not a play on any of the long-term trends we follow, and it doesn’t pay a dividend. And secondly, while I like the stock, it wasn’t really my original research that led me to it. It was recommended by Ryan Fusaro of LionEye Capital at the last Value Investing Congress.

I’m mentioning the stock because I like the way Fusaro thinks, and I wanted to share his thought processes with you.

Fusaro was attracted to Jack in the Box for three main reasons:

1. It recently transformed from being a restaurant operator to a franchiser.
2. The company owns Qdoba — which is a competitor of the popular Chipotle (NYSE:CMG[3]) burrito chain.
3. The company has significant chunks of non-core real estate that can be sold or rented.

Let’s start with the first point. Years ago, I heard personal finance guru Robert Kiyosaki of Rich Dad, Poor Dad fame make the comment that McDonald’s (NYSE:MCD[4]) was not in the business of selling hamburgers. Like Kiyosaki himself, McDonald’s was in the business of land-lording — buying properties and collecting passive rent income.

His comments weren’t entirely accurate, but his point was well made. McDonald’s became an international powerhouse by becoming a franchiser that sold a profitable turn-key business to investors and collected royalties in exchange. It certainly wasn’t because of the quality of their burgers.

Jack in the Box made an excellent strategic move to follow in McDonald’s footsteps. As a franchiser, you essentially own a portfolio of income-producing assets. The individual franchise owners take on most of the business risk.

The second point is interesting, particularly in light of fellow Value Investing Congress attendee David Einhorn’s comments on rival Chipotle.

Einhorn, who runs Greenlight Capital, caused quite a stir by recommending that investors dump shares of Chipotle[5] — which has been one of the best-performing stocks of recent years — because it faced a threat from Yum! Brands‘ (NYSE:YUM[6]) Taco Bell.

I have to agree with Einhorn, and between the two, I like Yum Brands’ stock better anyway. While Taco Bell is not something I care to eat regularly, Yum has excellent exposure to emerging markets and, at least when compared to Chipotle, trades at an (almost) reasonable 18 times earnings. Chipotle, even after its recent selloff, trades at more than 30 times earnings — a valuation you might have expected from a 1990s tech stock.

But I digress …

While Chipotle’s stock is unattractive at current prices, I expect good things for the company and for its imitators like Qdoba. Americans — and particularly Generation X and the Echo Boomers — are more health-conscious than their forebearers were at this stage of their lives, and they also have more disposable income. The higher-end fast-food concepts such as Chipotle and Qdoba offer a (relatively) healthy option at a price only a couple dollars higher than traditional junky fast food.

In the case of Jack in the Box, Qdoba represents a largely hidden asset buried on the balance sheet of a “boring” old-line burger chain.

And finally, the non-core real estate argument was the same one used by Eddie Lampert when he took control of Sears Holdings (NASDAQ:SHLD[7]) and Kmart. In the case of Jack in the Box, I consider this less of a selling point.

In any event, I like Jack in the Box, and I expect it to do well in the years ahead. But be warned: Value plays like these often take years to bear fruit, and as Jack in the Box does not pay a dividend, you’re not being paid for waiting.

All of this said, I like Fusaro’s thought process in this recommendation. Ideally, an attractive stock investment should have some creative angle that other investors are overlooking. Most of our picks follow this line of reasoning, and — frankly — in the cases where some of my picks have not performed as well as hoped, this element was missing.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”[8]

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