I dunno JACK
March 30, 2010 1 Comment
I woke up this morning, having yesterday acquired 43 shares of JACK, with much the same feeling as the mornings following a real Jack-in-the-Box experience: regret, tinged with reflux. And the faint taste of Oreo Shake in my mouth.
What I’ve done now for two weeks is buy based on the sheen of Warren’s commentary — the pop-culture potables — rather than the substance. (Much as Jimmy Buffett fans cling to the sheen of his “music” rather than legitim– sorry, easy set-up, had to take it.)
Anyway, one thing WB made perfectly clear this week: identifying “attractively priced” is hard. For him. Which means it should be astronomically difficult for me. Therefore my selecting Jack-in-the-Box on a basis of overt feminism, french-fry allegiance, and Jimmy Buffett vengeance-buy is hardly the stuff of Berkshire.
It’s the stuff of JERKshire.
(Note: this is why I limit my weekly damage to $1000, even though it means I can’t take full advantage of an attractive price if I actually find one. Although I make the rules around here, so anything goes.)
What should I have done? Probably read up on some actual financials beyond the large-print ticker at Google Finance. So: this week I’m going to take a break from Warren’s letters to shareholders and read someone else’s: Jack’s. I’ve scanned 10-Ks before (mostly to see how many shares execs have), but this time I am going to devour JACK’s entire 2009 10-K, and all the little baby 8-Ks, and everything else I can find in EDGAR (Electronic Data-Gathering, Analysis, and Retrieval). Let’s do some homework and see how little I really know before plodding ahead with the rest of this endeavor.
Otherwise, like Mustache Dad from 1987, I’ll have no one to blame but myself:
THE BROTHERS BUFFETT 
I hate to admit it, Davi, but I love your writing. JERKshire? So strong.
For me the hardest to follow of Warren’s rules is “only invest in things you understand.” To him you “understand” something when you can with high confidence make accurate ten year predictions about the economics of the business. That ain’t no easy thing to do.
Skimming through JACK’s financials, a couple things jump out at me, and they’re both related to the strategy of increasing the percent of stores owned by franchisees to 70-80% (from 40-something now) by the end of 2013.
First, the operating earnings of the company for the past several years have been inflated by the one time games that come from selling company owned stores to franchisees. In 2009 that was $78M of $230M in operating income (34%); in 2008 it was $66M of $216M (30%). Those gains are real earnings, but they’re not repeatable (you can only sell a restaurant once). So, if you want to look at the P/E multiple you should strip out these one time gains. In 2009, EPS excluding these gains was in the $1.45 range; in 2008 it was also in the $1.45 range. Here at a $23.60 stock price the P/E is closer to 16x (average for the market to a little high) rather than 12x (which is what it looks like at first glance).
Second, if they succeed in getting to the point where 70-80% of the stores are franchised, they’re going to have better returns on capital, because they won’t have as much capital (less land, fewer stores, etc.). That’s a long term positive, I suppose.