Wedbush Develops An Appetite For Jack In The Box

Restaurant chain Jack in the Box Inc. JACK's move to sell its Qdoba business is among a handful of reasons why analysts at Wedbush are turning bullish on the stock.

The Analyst

Wedbush's Nick Setyan upgraded Jack in the Box's stock rating from Neutral to Outperform with a price target boosted from $104 to $115.

The Thesis

The case for being aggressive on Jack in the Box's stock is based on the fact that investors now have visibility into the company's cash flow by the end of 2018, Setyan said in the upgrade note. (See the analyst's track record here.) 

Four factors make this possible, Setyan said: 

• The Qdoba sale and transition services agreement are in sight.
• Refranchising is at an end.
• A better idea of what franchisee re-image contributions beyond fiscal 2018 will be.
• A new credit agreement near completion or in place.

Based on these factors, the analyst is now modeling a fiscal 2019 free cash flow of $139 million that could grow over time to $170 million. Investors can look at Jack in the Box's underlying free cash flow as a primary driver of valuation, Setyan said. 

Wedbush projects the "vast majority" of Jack in the Box's cash generation will be returned to investors. The company is expected to return $200 million in the back half of 2018 and $540 million in fiscal 2019 — more than 25 percent of its current valuation — in addition to $85 million in dividends, the analyst said. 

Despite several "moving parts" still in motion, the increasing visibility into Jack in the Box's cash flow generation will ultimately result in a higher valuation for the stock, Setyan said. 

Price Action

Shares of Jack in the Box were down 0.30 percent at $94.26 at the time of publication midday Friday. 

Related Links:

Baird: The Potential Restaurant Winners From A New Tax Bill

A Restaurant Pair Trade: Jack In The Box Vs. Bloomin Brands

Photo courtesy of Jack in the Box.