Jack in the Box (NASDAQ: JACK) share prices tumbled over the last year as the Del Taco acquisition weighed on sentiment, but the rebound is on, and the upside looks tasty. The acquisition was questionable, and the rationalization of the business took longer to gain traction than expected, but it is gaining traction. The Q2 results aren’t stellar but reveal the impact of Del Taco's re-franchising efforts and point to a return to growth by fiscal year-end with accelerated bottom-line results.
How high can the rebound go? It can go quite high, using the analysts as a gauge. Trading near $53, JACK shares were at the lowest level since the pandemic bottom and offered up a deep value opportunity relative to their outlook. At $53, even at $57.50, the stock is below the analysts’ lowest target, with a potential for a 50% upside at the consensus midpoint.
Jack in the Box has Mixed Quarter: Positioning for Growth
Jack in the Box had a mixed quarter. The $365.35 million in revenue is down 7.7% from last year and missed the consensus target by 100 basis points. Still, the weakness is primarily due to re-franchising compounded by soft market conditions. The core Jack in the Box brand saw sales contract by 1.6% on a -2.5% contraction in comps offset by a slightly higher store count. The smaller Del Taco segment contracted 1.3% on a 1.4% decline in comps.
The strength is seen in the margin. Sales trends and re-franchising impacted the company’s margins, but lower SG&A helped offset this. The net result is a 6% decline in adjusted EBITDA compared to the 7.7% top-line decline and adjusted earnings that are roughly flat compared to last year.
The adjusted $1.46 is a penny shy of last year’s adjusted result and aided by share repurchases. Jack in the Box repurchased 0.2 million shares in Q2 to bring the average count down by 5% compared to last year. The company has $210 million left under the current authorization, so it is expected to continue repurchasing as the year progresses.
Jack in the Box Capital Returns Come With Risk
Jack in the Box has an attractive capital return with combined dividends and share repurchases of more than 8% in effective yield. The dividend is safe at face value with a payout ratio of less than 35%, but there are risks. The annualized outlook is solid, but Q2 results include negative cash flow and a sharp decrease in balance sheet cash that poses a threat. Cash flow should improve as the year progresses, with re-franchising leading to leaner operations and impairments falling off the books, but this detail should not be ignored.
Meanwhile, Jack in the Box is growing. The company increased the store count for both segments during Q2 and expects to continue growing the footprint this year. Del Taco is expanding in Greensboro, NC and Atlanta, GA, while Jack in the Box added five new development agreements in Florida. The agreements are for restaurant locations in Tallahassee and Orlando, bringing the total of signed but not completed projects to 365, a 15% increase in the footprint.
The Technical Outlook: Jack in the Box is at Rock Bottom
Jack in the Box shares fell to rock bottom pricing ahead of the Q2 release and confirmed support at a critical level following. The market is up nearly 10% in a high-conviction move and is likely to continue higher. There is potential for resistance at the $60 level, but oversold stochastic and MACD and divergence in the MACD histogram suggests the rebound will not stop there. if it does, this stock could fall below $50 soon. However, a move above $60 (the lowest analyst price target tracked by Marketbeat) opens the door to $70 and $77, which may be reached soon. If the company can continue gaining traction, it could continue rallying to retest the high end of its trading range by the end of the year.
