Well, we had some good plays and bad plays this week. We have a number of open positions currently moving into the end of the week. We have GFI Group (GFIG), which we got into at 4.85. We are looking to sell that at 5. We are in Trina Solar at 26.72, which most likely will be held through the weekend as we need more than a 3% gain in order to get out of this one. We are also involved in a Midterm Trade in Atlas Air (AAWW) at 52.92. We are looking to exit at 54.48 and higher. Yesterday, we closed American Express out for a 0.75% gain, and we made 2% on our Short Sale in Insteel (IIIN).
Things are looking up in the market this morning after another positive set of earnings. Since we are so toppy, I think the market is going to continue this yo-yo for some time. Up in the morning and down throughout the afternoon. We will look to get out of these positions before lunch. 
Longterm Rating: Jack in the Box Inc. (JACK)
Thesis
Jack in the Box Inc. (JACK) has become one of the leading fast food restaurants in the USA. Before the recession, Jack in the Box appeared to be a company that was poised for tremendous growth as it grew its revenue from 2000 to 2007 75%. The combination of unemployment and weakness in consumer spending has adversely affected JACK through declining revenue and income levels. The company is poised to see another drop in revenue this year from 2009. Despite hard times, Jack in the Box is one of the most attractive companies in the restaurant sector. The company has differentiated itself from rivals with a unique menu, a growing concept in Qdoba, and an engaging television campaign. As employment returns, Jack in the Box will find itself a severely undervalued company with lots of room for growth.
One of the best reasons to like Jack in the Box is its current undervaluation. The company has a current P/E ratio of just over 12 at 12.54. The industry average is 18.00 with competitors like McDonald’s (MCD), Burger King (BKC), and Yum Brands (YUM) with P/E ratios at 16, 12, and 18 respectively. At its 2007 revenue, JB was at at nearly $40 per share with a P/E ratio above the industry average. It now sits at less than $20 and below the industry. Yet, JACK has had the same exact hit to its revenue as other companies.
JACK has a number of very attractive qualities. Qdoba, a Mexican-burrito-style restaurant, in the same vein as Chipotle, tops the list. This year, the company is planning to open forty more Qdoba restaurants. The company has added a significant growth capability to the company and is well positioned to compete in the sector with Chipotle. Another attractive aspect of JACK’s business is that the company is looking to enfranchise 70-75% of its business by 2013. All new business being opened are franchises, and some older stores are being enfranchsied. This move by JACK will help the company reduce overhead and help them gain money by selling off current assets for enfranchisement.
While the company has suffered from the recession, the company has focused on a significant re-imaging project that is supposed to finish in 2011. The campaign is helping to remarket Jack in the Box and help it to become a larger player in the marketplace. The ad campaign highlights the company’s diverse menu and is followed by a fresh, new logo. JACK’s menu, which has everything from tacos to macaroni ‘n cheese to burgers helps separate the company from other fast food joints, creating a small economic moat.
An even more appealing aspect of Jack in the Box is that the company has a great ability to expand. It is mostly centered in the West and Southwest, but the company is slowly creeping into the Midwest and East. Most expansion has been stalled by the recession, but expansion would be a great way for the company to increase its revenue and share price. Additionally, the company recently did a complete overhaul of its capital structure to help it increase its future capabilities as well, which is a great sign for financial strength.
Overall, what is appealing is that Jack in the Box is a company setting itself up for the future. Between remarketing, expaning, bringing on Qdoba, and enfranchising itself, the company is reducing costs and bringing a new image to the company. All these signs point to a bright future, but they will not occur until the company can break out of the economic slump they are in currently.
The company has seen the recession hit it most hard in the past TTM. The company has seen its operating margin, net margin, return on equity, return on invested capital, and asset turnover all drop. These five ratios are the blood of a company. The higher the number – the richer the blood.
The drop in these ratios does not represent failure or the ability for the company to improve in the future. In fact, it represents what is now – the company is hurt by unemployment. The company has ROE still at 19% in the TTM, which is well above the 12% benchmark that represents a strong ROE. The company has been as high as 27%.
A worrisome factor also is the company has a current ratio below one. The company has a lot of liabilities, but that is being addressed through a changing capital structure and movement towards enfranchisement.
The company has definitely hit a snag, but the prospects are still bright. Even with very modest growth numbers coming over the next five years that are well below 10%, the company still appears undervalued and a Buy opportunity.
Valuation
My fair value estimate for Jack in the Box is $30 per share based on discounted cash-flow analysis. The company has seen a dip in its ability to grow its revenue as of late. They have not seen the double-digit revenue growth they used to see in several years. Operating income should grow less than 10% for the next few years.
The company is a Buy below $24, and it is a sell above $31. With its current price, Jack in the Box is a Buy!
Good Investing,
David Ristau
