Is Jack in the Box a Peter Lynch Stock?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've been a big fan of Peter Lynch's stock picking method for a long time. I think both of his books -- “Beating the Street” and “One Up On Wall Street” -- should be required reading for all investors. Anytime I see a stock with a unique business or a funny name, I have to wonder if the company is one Mr. Lynch would be interested in. This theory brings us to the company Jack in the Box (NASDAQ: JACK). The company already passes one test that Lynch used. The fact the company's name reminds you of a kids' toy gives you a reason to start your research. (Funny Name – Pass)
Mr. Lynch wanted to see the company expanding and duplicating a successful formula. His idea was what works in one area of the country should work in other areas of the country as well. With 2,200 Jack in the Box restaurants in 20 states and 600 Qdoba restaurants in 42 states, you can see they have two concepts that they can replicate well. Since neither concept is near its saturation point, there should be years of growth ahead as well. (Successful Formula – Pass)
When looking at companies, Peter Lynch used to group them into categories so he knew what to expect. One of his favorite categories was “fast growers.” He defined a fast grower as a company expanding earnings by at least 15-20% per year. His theory was, if the company's earnings are growing by 15-20% per year, and the stock was fairly priced, then the stock value should move up 15-20% per year as well. Jack in the Box is expected to grow at a 11.69% clip in the next few years. A company that would fit Mr. Lynch's requirements, is Buffalo Wild Wings (NASDAQ: BWLD) with its 20.49% expected growth rate. (15%+ Earnings Growth – Fail)
Since companies can somewhat manipulate reported earnings per share, Mr. Lynch also wanted to see good cash flow from any company he was investing in. On this score, unfortunately Jack in the Box has reported negative cash flow in the last four quarters. This is the opposite of what Peter Lynch would have wanted to see. Negative cash flow can manifest itself in more shares being issued or more debt being utilized. Again it seems a better example would be Buffalo Wild Wings and its $18 million in free cash flow over the last four quarters. (Good Cash Flow – Fail)
Since we have already seen that Jack in the Box has reported negative cash flow, it makes sense to expect this has taken a toll on their balance sheet. Unfortunately for Jack in the Box shareholders, this is exactly what has been happening. The company's long-term debt in particular has increased by 21.64% in the last year. If this trend continues, Jack in the Box will not only have trouble continuing to expand, but the company's ability to continue operating could be in trouble. Compare Jack in the Box's balance sheet to Buffalo Wild Wings, and again, BWLD comes out ahead with zero long-term debt. (Good Balance Sheet - Fail)
Another factor that Mr. Lynch believed led to successful companies was a high level of insider ownership. If the people running the company own a lot of shares, they are more likely to do what is in shareholders' best interest, instead of just protecting their paychecks. On this score, CEO Linda Lang owns about 261,000 shares. At current prices this represents an investment of about $6.2 million. With her annual pay at about $1.6 million, she owns nearly four times her annual salary in shares. While this is a bullish bet, her other executives aren't as daring. Most have less than two times their annual salary in shares. While I appreciate the CEO's commitment to holding these shares, Mr. Lynch was looking for more. He wanted to see 5% ownership or a more significant amount versus the person's annual salary. (High Insider Ownership - Fail)
Looking at the final tally, Jack in the Box only passes two of six tests. It seems that Mr. Lynch would have put Jack in the Box on his “tune in later” list. One thing we did discover is Mr. Lynch might have used this same type of research to do more investigation of Buffalo Wild Wings. He said that many times research on one company led him to another. Since Buffalo Wild Wings passed several of the tests that Jack in the Box failed, this might be a company to watch as well. Use this information as a starting point for your own research, and set up a Watchlist on Motley Fool so you can keep up with the companies you follow.
Motley Fool newsletter services recommend Buffalo Wild Wings and Jack in the Box. The Motley Fool owns shares of Buffalo Wild Wings. MHenage has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.