Fast food has been a big winner in the COVID-19 pandemic. Just not hamburgers. Jack in the Box (NASDAQ:JACK) has now addressed the problem, buying Del Taco Restaurants (NASDAQ:TACO) for $575 million. It’s an all-cash deal, requiring no JACK stock.
But some analysts are suggesting JACK just bought more trouble. Before the deal was announced, Del Taco stock had been down 20% over the last year. The deal sent Del Taco shares rocketing upward, by 66%. They closed Dec. 8 at about $12.50, a penny below the offering price.
Where’s the Beef?
Rising beef prices have hit most of the hamburger chains hard. Wendy’s (NYSE:WEN) and Restaurant Brands (NYSE:QSR), owner of Burger King, are both down since the start of the year. The chicken sandwich wars have been partly to blame, one reason why McDonald’s (NYSE:MCD) is up 21%.
Taco restaurants buy a lot of beans, rice and corn, staples that can be sold for good margins. That may be why Jack CEO Darin Harris, who joined the company in 2020 and previously ran CiCi’s Pizza, made the move.
But all is not well at the taco stand. Revenue at Del Taco in 2021 is still running behind 2019 levels. Margins have been meager, and long-term debt has ballooned. It stood at $352 million in August, about 70% of annual revenue. Del Taco, in fact, had been looking for a buyer since 2019. Dine Brands (NYSE:DIN), which owns Applebee’s, was reportedly among those who kicked the tires on it.
Harris has big plans for Del Taco, a game plan already being implemented at Jack in the Box.
Under Chief Technology Officer Doug Cook, hired in October, the company is going all-in on robotics, with automated fryers, drink machines and self-cleaning milkshake stations. (Full disclosure. My brother once burned his hand dunking it in a Del Taco fryer. It was 40 years ago. He’s fine.)
Jack is also testing Impossible Burgers at Phoenix restaurants. Plant-based protein can get around the beef shortage, but it’s still more expensive than what it replaces. The company also tested a plant-based chicken sandwich in 2020, with product supplied by Tyson Foods (NYSE:TSN).
Fast Food Gold Rush
Fast food has been undergoing consolidation over the last few years, as companies bulk up with multiple chains to catch changing tastes.
Burger King owner Restaurant Brands, which scored with Popeye’s, now hopes for the same joy in Firehouse Subs. BurgerFi International (NYSE:BFI), which just went public, is buying a pizza and wings chain. Sweetgreen (NYSE:SG), which came public in November, bought Spyce, a veggie bowl company heavy into automation.
Then there are larger roll-ups like privately held Inspire Brands, which now owns Arby’s and a half-dozen other chains. There’s also JAB Holding, a family-run European company that holds a half-dozen breakfast operations and spun-out Keurig Dr Pepper (NYSE:KDP).
The Bottom Line on JACK Stock
If Harris can create growth at Del Taco, and use automation to increase margins, JACK stock could be an attractive investment.
As it is, the Del Taco deal illustrates many of the trends now powering the industry. The pandemic, and inflation, have moved Americans to prefer fast food over dine-in options. A lot of investment is coming into the space, much of it from patient private equity buyers.
Analysts are optimistic on Jack in the Box. One has a price target of $130, 51% ahead of its Dec. 8 close. The stock is an intriguing speculation, a price-to-earnings ratio of just 12 and a price floor created by private equity demand.
On the date of publication, Dana Blankenhorn held no positions in any company mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.