I have been spending the bulk of my time lately getting ready to move, getting ready for another baby girl coming in late October, and writing my book.
We are staying in the same area just getting a bigger house to accommodate our growing family but packing and doing house related things to get ready for closing on both of our houses on the same day later in June, yikes, has been taking up the majority of my time in recent weeks. Excited but also cannot wait until we are moved and settled in so things can start slowing down again and I can start working on me and my brothers business and researching companies more. I have been researching companies very slowly but up to this point, I am finding everything to still be overvalued. The search continues though and I hope to pick up steam again after I move and get the book finished.
I am done writing my book and am now onto the editing and revision stage. So far I have gone through the introduction and six chapters and am getting very excited. While I was writing the book I was just trying to get the main transcript done without concentrating much on how good it actually was. Now that I am able to read through the transcript as I am editing and revising it I am getting very excited because I think I will be able to help a lot of people become better investors faster and I cannot wait to release it to everyone. I hope to have most of the editing and revising of the book done by early July and hope to release the book sometime in the mid-October to mid-November time frame. I also plan to release a chapter or two online before the book comes out as well. Of course, if I get picked up by a publisher these things will likely change but if I self-publish the book on places like Kindle and others then that is the time frame I am shooting for.
As a thank you to the loyal readers of this blog, my followers on Twitter and Seeking Alpha, and my Facebook friends I also wanted to let you know that if you follow me on this blog, Twitter, Facebook, or Seeking Alpha that you will be getting a 25% discount off of each package I am going to offer for my book. The same discount is going to apply to anyone who mentions this blog or the upcoming book on Twitter, Facebook, or Reddit as well. If you want a discount when the book comes out make sure to # or @ me on Twitter, get my attention on Facebook, or email with the link where you mentioned this blog or the upcoming book as I will start to keep a list of everyone who has helped me promote this book and who has supported me while I was just getting started. I also plan to offer an even bigger discount or prize of some kind for the person or people who help promote the book the most but have not come up with a solid idea for that yet. Again this is all dependant on what a publisher would want to do if it comes to that but this is what I want to do.
I also want to let everyone know that we will be welcoming our second baby girl to this blog in late October whose name will be Kailani. My family is one of the main reasons I have decided to write a book because I would like to find a way to start making some money from my investment writing so for every book package you buy. Every book you buy or help promote will help support my family and keep continued free content on this blog, and it will be immensely appreciated. I would like to keep most everything on this blog free except for the book and some other premium content I have planned and any help you can offer would help support that.
Yesterday news came out that the majority owner of Dole, Mr. Murdock, was attempting to take Dole private again at $12 a share. Dole came public at a price of $12.50 a share a few years ago. After some of the things that Dole management has done in the past few weeks from saying their land suddenly wasn’t worth as much money, to saying they were going to do a buyback, then a few days later not doing a buyback, to this low ball buy-out offer I am very glad that I got out of Dole when I did. I figured that something fishy was going on when they said that some of their lands suddenly wasn’t worth as much money as they thought and had a conversation with one of my followers on Seeking Alpha about how something funny was going on and how management might be trying to lower the price of the stock so they could take it private again. Unfortunately, it appears that I was right because by my conservative estimates Dole is worth somewhere between $15 and $22 a share. If Dole management is able to pull this off and only take the company private for $12 a share then there should be an investigation into what management has done over the past month or so as its shareholders are about to get screwed.
I will continue to update happenings on the book and if I find a company to write an article on but until I move later this month posts will continue to be few and far between most likely.
Remember if you follow this blog, me on Twitter, Facebook, or Seeking Alpha you will get a discount on my book when it comes out so please share this with as many people as possible so they can get the discount too, thank you.
I am going to be taking another week or so away from researching companies to concentrate on learning more about floats and moats, and then start applying some of the lessons I have learned, especially about float, to the companies I have already written articles about. Directly below is some of the material I have been learning from.
These things along with the information on floats and moats that I have previously posted from the Fundoo Professor, are the types of things I have been learning from recently. Now I am going to go back over all the companies I have written articles on to determine if they had any float and will report back to you sometime in the next week about my findings and then it is on to finding more companies to research.
I also found two fantastic blogs that I highly recommend going back and reading all of their blog postings.
Also, Sahara Investing has recently published an article on Strattec, which is a company I own, and he came to a differing conclusion than I did and I wanted to share his fantastic article with you.
Plans For This Year
I am a very simple guy with simple wants and needs so I only have two plans and one goal for this year.
Continue to learn something new and improve in every aspect of life every single day.
To get completely healthy.
My one goal for this year is that by this time next year I want to have started my own investment partnership/hedge fund.
If any fellow value investors would like to collaborate on something like this please let me know as I have already started the process of looking into what I legally need to do to start an investment firm, I have already talked to my buddy who is a lawyer who said he will look into what exactly I need to do, and would be very interested in listening to any potential opportunities you may have thought of.
5 Reasons To Doubt My Analysis is an article from Old School Value, written by Daniel Sparks of ValueFolio, about why we should all doubt other people’s analysis, and why we should all do our own analysis when it comes to making investment decisions.
Munger On Deferred Tax Liabilities and Intrinsic Value is a very technical discussion on those two topics and how to incorporate some of the information into valuations. The site also has a couple links to Seeking Alpha articles on the subject as well. I have to admit that some of the stuff goes over my head and the highly technical aspect of investment analysis is an area where I know I need to get a lot better at.
Up next will be some more links until I decide whether I am going to do an entire write up on the company I start researching tonight.
Recently I have been seeing quite a bit about Jack in the Box (JACK) and its long term potential through a possible spin off down the road of its subsidiary Qdoba, the entire company being bought out by one of the bigger fast food chains, or though its margin growth now that it has about 72% of its Jack in the Box fast food restaurants being owned by franchisees. Franchise royalty margins I have seen estimated as high as 80%.
After seeing all of the above and how undervalued everyone seems to think JACK currently is, I decided to research the company myself. Most of what I have read about JACK from other people is that it is undervalued because of the “Future potential” of the company with what I talked about in the first paragraph given as reasons; there are a lot of ifs in every pro JACK article I have read thus far.
If you have read any of my previous valuation and analysis articles, you know that is not how I operate. For those of you who have not seen any of my previous articles I do not base my buy or sell decisions on ifs. I value the company’s assets and operations as it is now, and future potential is only icing on the cake to me in most cases. Here is an overview of my investment philosophy.
With the rest of this article I will be showing you why I think JACK is overvalued and give you reasons why I will not be investing in it at this time.
Jack In the Box Overview
JACK owns and operates a total of 2,247 Jack in the Box fast food restaurants, about 72% of which are owned by franchisees. Jack in the Box is one of the largest hamburger chains in the US with operations in 19 states, with the vast majority of its operations in California and Texas. JACK also owns Qdoba and has 614 total restaurants, about half of which are owned by franchisees. Qdoba is a fast food Mexican restaurant with operations in 44 states currently. For further information on JACK please visit its website here.
Jack in the Box has recently finished up reimaging some of its restaurants by changing the logo, updating the menu, and making its restaurants look more modern. The recent reimaging of Jack in the Box restaurants has led to higher capital expenditures and sometimes lower revenues over recent years. Now that the bulk of the reimaging is done, Jack in the Box is hoping to become even more profitable.
In recent years Jack in the Box has under gone the process of selling some of its restaurants to franchisees so it can get into the higher margin area of collecting royalty and franchise fees. Jack in the Box currently has around 72% of its restaurants owned by franchisees with plans to eventually have 80% of its restaurants owned by franchisees.
Qdoba has been going through a rapid growth phase since being acquired by JACK in 2003 and JACK management states that it believes there is future potential of between 1,800 and 2,000 Qdoba restaurants in the United States.
As of the most recent 10Q, JACK gets 56.9% of its revenue from sales at its restaurants, 27.7% from distribution sales, and 15.5% from franchise and royalties. Total company costs are 83.5% of total revenues which come from food and packaging 32.3%, payroll and employee benefits 28.7%, and occupancy and other 22.5%.
These valuations are done by me and are not a recommendation to buy stock in any of the following companies mentioned. Do your own homework. All numbers are in millions of US dollars, except per share information, unless otherwise noted. The following valuations were done using its 2011 10K and 3Q 2012 10Q.
I did my other normal valuations as well but from now on plan to only post the ones that I think are most relevant.
Low Estimate of Value:
Cash & Cash Equivalents
Accounts Receivable & Other Receivables (Net)
Deferred Income Tax – Deferred Tax Liability
Assets Held For Sale & Leaseback
Other Current Assets
Total Current Assets
Other Assets Net
Number of shares are 45
Without goodwill: 783.3/45=$17.40 per share.
Base Estimate of Value:
Cash and cash equivalents are 10.8
Short term investments are 0
Total current liabilities are 266
Number of shares are 45
Cash and cash equivalents + short-term investments – total current liabilities=
10.8+0-266=-255.2/45=-$5.67 in net cash per share.
Jack in the Box has a trailing twelve month EBIT of 120.
5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:
5X=610.8/45=$13.57 per share.
8X=970.8/45=$21.57 per share.
11X=1330.8/45=$29.57 per share.
14X=1690.8/45=$37.57 per share.
From this valuation I would use the 8X EBIT and cash estimate of intrinsic value, $21.57 per share.
High Estimate of Value:
Average 5 year EBIT %:
Estimated EBIT of:
Assumed Fair Value Multiple of EBIT:
Estimated Fair Enterprise Value of JACK:
Cash, Cash Equivalents, and Short Term Investments:
Estimated Fair Value of Common Equity:
Number of Shares:
$29.92 per share.
I will explain my reasons for picking these valuations in the conclusions portion of this article, but by my estimates JACK Is currently either fairly valued or overvalued by almost every valuation technique I did, except for the valuations with very high multiples.
Margins and Debt In Comparison To Competitors
Jack in the Box (JACK)
Yum Brands (YUM)
Chipotle Mexican Grill (CMG)
Gross Margin 5 Year Average
Gross Margin 10 Year Average
Op Margin 5 Year Average
Op Margin 10 Year Average
ROE 5 Year Average
ROE 10 Year Average
ROIC 5 Year Average
ROIC 10 Year Average
FCF/Sales 5 Year Average
FCF/Sales 10 Year Average
Cash Conversion Cycle 5 Year Average
Cash Conversion Cycle 10 Year Average
Insider Ownership Current
Total Debt as a % of Balance Sheet 5 year Average
Total debt as a % of Balance Sheet 10 year Average
Current Assets to Current Liabilities
Total Debt to Equity
Total Debt to Total Assets
Total Contractual Obligations and Commitments, Including Debt
Total Obligations and Debt/EBIT
My thoughts on the above comparisons:
McDonald’s is by far the most profitable company of the five as it far outdistances the competition in gross margin, operating or EBIT margin, FCF/sales, etc.
Sonic and Yum Brands’ ROE and ROIC are astounding but are inflated by both companies high levels of debt in comparison to the other three companies.
JACK’s margins have generally declined in the last five years in comparison to the entire 10 year period. Most of the other company’s margins during that time have been improving.
Chipotle’s margins are pretty amazing, especially when you see that it does not have any debt so the numbers are not inflated like Sonic and Yum.
On an EV/EBIT basis Chipotle looks to be very overvalued currently with a ratio of 26.53.
The insider ownership of all the companies is horrendous.
The P/B of this industry is by far the highest I have seen since doing in depth research.
The EV/EBIT ratios are also much higher than the companies I have been researching lately.
The P/B and EV/EBIT ratios being much higher than what I have been finding lately leads me to believe that this entire industry is either fairly valued or overvalued currently.
The entire industry has some very high debt levels due to the costs of food, restaurant leases, etc. Debt levels have risen quite a bit recently as all of the companies, with the exception of CMG and MCD, have taken on more debt in the past five years.
MCD, YUM, and CMG’s total obligations and debt/EBIT ratios look very sustainable into the future.
JACK’s total obligations and debt/EBIT ratio is dangerously high at 21.67. Especially of concern is that the bulk of its obligations and debt are due before 2016.
Sonic’s debt levels also seem to be too high to me.
Helping out SONC, MCD, YUM, and CMG is that most of the four company’s debt and total obligations are coming due after 2016.
Let us now get back to JACK.
JACK has been buying back a lot of shares and has reduced its share count by 13 million since 2009, down to 45 million as of the most recent quarter.
JACK has decent margins that have been consistently positive over the past decade.
Now that the reimaging of Jack in the Box is done cap ex should go down and profit margins should go up over time.
Qdoba is a high growth asset that is also currently more profitable than Jack in the box.
JACK’s debt ratios, excluding total obligations, all look very good compared to its competitors.
Selling restaurants to franchisees will get JACK into the higher margin business of collecting royalty and franchise fees.
Fortunately most of JACK’s debt has low interest rates.
JACK owns the land underneath some of its restaurants which provides at least partial downside protection due to the possible sale of the land if it was facing dire problems and was forced to sell some of its assets.
JACK’s debt ratios above are very misleading as they do not include contractual obligations and commitments.
JACK’s total obligations and debt in comparison to its profitability levels are way too high in my opinion with a total obligations/EBIT ratio of 21.67, which is by far the highest of the group and dangerously high in my opinion.
Most of its debt and obligations are due within the next 5 years further exacerbating the debt situation in my eyes.
Margins have been declining at JACK over the past five years, in part due to the reimagining of its Jack in the Box restaurants.
JACK’s margins while decent and relatively steady over the past few years, are also generally quite a bit lower than its competitors.
JACK’s FCF/sales margin is negative over the past five years while the industry average is 7.35% over that time.
JACK is overvalued by almost every one of my estimates of intrinsic value.
The entire fast food industry appears to be either fairly valued or overvalued at this time.
About 85% of its revenues go towards paying costs, greatly affecting margins.
JACK will continue to put a lot of its resources towards opening and running restaurants and food costs. Some of the cost of new restaurants is paid by the developer however.
A 1% point increase in short term interest rates would result in an estimated increase of $3.6 million in annual interest expense. Interest rates can only go higher from where they are at now.
Has a low amount of cash on hand.
Managements pay seems too high to me.
How JACK management structures the pay, bonuses, and awarding of options and restricted stock is very convoluted. The most recent proxy is longer than the most recent annual report, most of which is spent explaining how management is awarded some of its compensation.
Horribly low insider ownership.
I do not see any kind of moat or competitive advantages within JACK.
Margins should rise now that the store reimaging of Jack in the Box restaurants are done, which could eventually lead to a higher estimate of value.
The total obligations and debt situation could be a negative catalyst if JACK should have any problems.
As of the most recent proxy, Fidelity Management & Research Company owns 14.9% of JACK. If FMR decides to liquidate a portion or all of its position in JACK there could be a big sell off in the stock.
If JACK management decides to sell or spin off Qdoba it would send the stock price higher.
JACK could be bought out by a bigger fast food chain.
The reason I chose the above estimates of intrinsic value, that I am sure the JACK bulls will say are too low, are because of the problems I found with JACK as it currently stands: Its huge amount of total obligations and debt, the bulk of which is coming due before 2017, its relatively low and decreasing margins in comparison to its competitors, along with all of the other reasons I outlined above.
I need as big of a margin of safety as possible and for the most part only value what I see in the company as it presently stands. All of the other articles I have seen have been talking about how much JACK could be worth if it spun off or sold Qdoba, or the entirety of JACK gets bought out.
To my knowledge, JACK management has not said anything about spinning off Qdoba so to me valuing a company on speculation of what could happen in the future is very dangerous. I saw an article the other day where someone wrote that if Qdoba was spun off could sell for 30X EV/EBITDA because that is what Chipotle sells for. Buying any company at 30X EV/EBITDA is insane to me, especially potentially Qdoba as I do not think it has any discernible sustainable competitive advantages. I do not even know how someone would make money on that transaction, especially since Qdoba would most likely not pay any dividend as it needs to grow its store count.
Even if JACK management does decide to spin off or sell Qdoba, the valuations and analysis that I laid out above were encompassing the entire company, and I still found JACK to be overvalued on almost every count. I do expect JACK’s margins to rise over time now that the bulk of its reimaging is done, but the debt and total obligations scare me too much to be a buyer even if that happens.
Speculating is no longer what I do when investing, and to me buying into JACK now is almost purely a speculation play in the hopes that it gets bought out or spins of Qdoba. In my opinion, JACK is overvalued, has no discernible moat or competitive advantages, and has some huge problems with its debt and total obligations. Combined with the rest of my above analysis, I think JACK is a bad investment currently.
For me personally, how I invest, what I need as a margin of safety, and the problems I outlined in the article, lead me to the conclusion that the risks far out way the pros as JACK currently stands, and I will not be a buyer of it at this time.
Closed out partial position in Dole up almost 70% in Just 104 days
Dole today spiked up more than $2 per share at one point and ended closing today up $1.21 per share or 9.42% on the following news, the quoted text is from The Wall Street Journal Online:
Dole Food Co. Inc. said Wednesday it is in advanced discussions with Japanese trading house Itochu Corp. for the possible sale of its packaged-foods and Asian fresh fruit and vegetable businesses.
The California-based company, said no definitive agreements have been reached, and it continues to be in discussions with several other parties regarding these and other assets.
Dole said it divulged the talks in response to market rumors. Japanese business news provider Nikkei reported that Itochu is poised to purchase the U.S. firm’s businesses for as much as $1.7 billion.
Dole launched a strategic review of its businesses in May after reporting a slump in profits. The company said in July that it was considering a full or partial separation of one or more of its business, including potential spin offs, joint ventures and sales transactions.
Dole’s second-quarter profit fell 21% as the company saw lower fresh-fruit revenue, though sales of fresh vegetables and packaged foods improved.
After the news came out I sold just under half of the position I bought for a couple people’s money that I manage, cost basis around $8.50 per share sold around $14.50 per share, or up around 66% in just over 100 days since I bought it for them. Here is the link to my first article about Dole that got published on June 13th on Seeking Alpha.
I sold about half of the position because most of the margin of safety is gone and I wanted to lock in some profits in case the deal ends up falling through with Itochu.
I kept just over half the position because I valued Dole at the very low end at $18.25 per share and as high as $48.93 per share in June. I also kept about half of the position because if any of the potential deals do go through then Dole will be able to pay off most, if not all of its massive debt which is Dole’s biggest problem at this time. Also if it is able to pay off most or all of its debt, it could possibly start to grow its operations which could also help the share price.
Sometime in the near future I am going to start working on an updated Dole article and apply the knowledge and techniques I have learned since the original article.