Monday, April 18, 2011

Jack in the Box Inc (NASDAQ: JACK) Q2 2011 Price Target

Recent price: 20.89$
P/E Ratio: 14.52
3 Months Target Price: 24.50$

Company Description
According to Reuters, Jack in the Box Inc. is engaged in restaurant operations. The Company operates and franchises more than 2,700 Jack in the Box quick-service restaurants (QSR) and Qdoba Mexican Grill fast-casual restaurants. As of October 3, 2010, Jack in the Box system included 2,206 restaurants in 18 states, of which 956 were company-operated and 1,250 were franchise-operated. As of October 3, 2010, the Qdoba system included 525 restaurants in 43 states, as well as the District of Columbia, of which 188 were company-operated and 337 were franchise-operated. During the fiscal year ended October 3, 2010 (fiscal 2010), Qdoba franchisees opened 21 restaurants. In fiscal 2010, 46 Jack in the Box restaurants opened, including 16 franchise locations. In addition the Company expanded its presence in several markets in Texas, Colorado, Oregon, New Mexico and Oklahoma. In fiscal 2010, 36 Qdoba restaurants opened, including 21 franchise locations, and franchisees expanded into markets in Illinois, Texas, New Mexico, West Virginia and Mississippi.

Jack in the Box restaurants offer a selection of targeted at the adult fast-food consumer. Its menu features a variety of hamburgers, salads, specialty sandwiches, tacos, drinks, smoothies, real ice cream shakes and side items. Hamburger products include Jumbo Jack, Sourdough Jack, Ultimate Cheeseburger and Jack’s 100% Sirloin Burger. Jack in the Box restaurants also offer entree salads, specialty sandwiches, Teriyaki Bowls and every day value-priced products, called Jack’s Value Menu. It also offers customers the ability to customize their meals and to order any product, including breakfast items, any time of the day. These restaurants have seating capacities ranging from 20 to 100 persons and are open 18-24 hours a day. Drive-thru sales account for approximately 70% of sales at company-operated restaurants.

Confidence Margins
Strong resistance $26.37 (+26%)
Light resistance $24.51 (+17%)
Light support $20.25 (-3%)
Strong support $19.81 (-5%)

Jack in the Box has been severely hit by a downgrade from Credit Suisse stating that the rise in the price of commodities, more precisely the rise in the price of cattle, namely beef, which is a basic ingredient on most of their recopies. Even if those worries are justified, the company will certainly perform well by the next quarterly earnings as investors have already priced in the research results.

Entry strategy
For the cautious investor:
Buy the stock for 22$ or less.

For the risk-taking trader:
The June 2011 22.50$ out-of-the-money call option contract seems to be the right position to take, they can be acquired for about 60$ per contract.

Exit Strategy
For the cautious investor:
Sell when the stock reaches 22.50$, or keep it until 26$ if you are more bullish in your own analysis. The position should ideally be closed before the next earnings report that will fall somewhere around the end of May 2011.

For the risk-taking trader:
The contracts should be kept until the underlying reaches around 22.50$. This should provide a satisfactory return if the underlying reaches the target price as the contracts will get in the money.

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