Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Fusaro's Big Jack in the Box Pitch Runs Into Simple Problems


The young analyst made waves at the Value Investing Congress, but he's not seeing the whole picture.

MINYANVILLE ORIGINAL The Value Investing Congress in New York ended yesterday with a sea of headlines, especially concerning David Einhorn's endorsement of General Motors (NYSE:GM) and his controversial exhortation to short-sell Chipotle (NYSE:CMG) on his predictions about the success of Yum Brands (NYSE:YUM) and its Taco Bell restaurants. Minyanville contributor Lloyd Khaner also gave a well-received presentation on Jamba Juice (NASDAQ:JMBA).

But the food-related hubbub didn't stop there. LionEye Capital's Ryan Fusaro, a 27-year-old analyst who won a stockpicking contest, made his case for a long recommendation on Jack in the Box (NASDAQ:JACK), partially on the strength of its subsidiary Qdoba, the burrito chain that is often (but not by Einhorn) cited as a major competitor for Chipotle. Qdoba is at the center of Fusaro's recommendation of parent company Jack In The Box.

On the surface, Jack in the Box is a good-looking stock. A year ago, the San Diego-based company was worth $19.26 per share, but today, it sits at $27.41. The restaurant is also primarily located throughout the West Coast, a fast-growing area of the country. Qdoba's fast-casual Mexican food has also proven to be a hit, fitting into the price niche that Panera (NASDAQ:PNRA) and Chipotle, among others, have exploited in the past few years.

Like Einhorn's pick, though, this one seems like it has a few unanswered questions. Many analysts are worried about the declining sales trend for restaurants in the last five years. Furthermore, Qdoba's status as a competitor isn't just a positive. Sure, that means it could threaten Chipotle, but it also means there are much bigger fish already in the market in the form of Taco Bell and Chipotle (as well as West Coast mainstays like Del Taco and, y'know, actual taquerias). Tellingly, there's only one Qdoba in Los Angeles, while the eight in Manhattan are well outside traditionally Hispanic areas like Spanish Harlem and the Lower East Side.

Minyanville contributor Peter Prudden, General Partner of SISU Advisors, is not entirely sold on Fusaro's idea. "World food prices jumped 10% in July, which takes a toll on consumer spending and ultimately corporate earnings," he says. "The more money consumers spend on food, the less they'll have to spend on other goods. Sure, corporations can pass their higher costs onto their customers, but in return, if consumers don't buy as much because of higher prices, the corporate earnings -- including those of fast food chains -- decrease."

Prudden also points out that McDonald's (NYSE:MCD), Buffalo Wild Wings (NASDAQ:BWLD), Chipotle, and Starbucks (NASDAQ:SBUX) are already experiencing the impact of higher food prices even as retail prices remain fairly cheap. "Basic math says higher costs result in lower profits," he advises. In August, for example, the CEO of Buffalo Wild Wings warned investors that the cost per pound of chicken wings was up 86% in the second quarter.

Minyanville contributor Ron Thomas also cast doubt on the recommendation, saying, "The stock, using an 8% discount rate for a low-grade high-risk restaurant chain, discounts a 13% growth rate from consensus EPS for the 2013 financial year. That looks way too high." Among other concerns, according to Thomas, Jack in the Box needs investment from franchisees given the declining sales trend, and Fusaro's valuation is therefore far too high, as the company is facing the same problems as everyone in the restaurant industry: Drought, competition, declining sales, a weak economy, etc. If Einhorn is right about Chipotle, in other words, Fusaro is wrong about Jack in the Box. Anyone like those odds?
< Previous
  • 1
Next >
No positions in stocks mentioned.
Featured Videos