Investment Presentation (JACK) and Readings

Don’t Confuse Growth With Sustainable Competitive Advantage

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

–Warren Buffett, Fortune magazine, 11/22/99


Watch Ryan Fusaro, Value Investing Challenge winner present his top idea: Jack In the Box

Ryan Fusaro, winner of the Value Investing Challenge, shared his analysis of Jack in the Box and how the company’s refranchising efforts will unlock enormous value at the 8th Annual New York Value Investing Congress. Click here to watch a video of his presentation!

Long Jack in the Box (JACK)

Fusaro won and pitched Jack in the Box (JACK) in his talk entitled ‘Thinking Outside the Box.” He started with some history that JACK has refranchised from 25% in 2005 to 75% today.

– Incomplete financial reporting
– Potential margin improvement
– Great brands
– Cost structure hasn’t caught up with franchise model

He touched on how JACK owns Jack in the Box but also owns Qdoba, which has typically been too small to really matter but is now worth $580m by itself and value could be unlocked with a spin-off. Think McDonald’s (MCD) when it spun-off Chipotle (CMG). JACK also owns the real estate.

Fusaro says there’s a growth business embedded in a value business and also touched on unlocking real estate value.

Read more:

Presentation:Fusaro-VIC-Presentation_Jack in the Box_JACK

Let me know if you think the above was worthy of a prize?

Free-Market Money?

Dinner with Pabrai? Who will beat my bid?

Mohnish Pabrai is auctioning off two items: lunch with himself (plus a stock tip) and a life-size bronze bust of Charlie Munger. The proceeds of both will go to the Dakshana Foundation, which he established to help academically promising poor kids in India:


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Have a good weekend.



12 responses to “Investment Presentation (JACK) and Readings

  1. “Let me know if you think the above was worthy of a prize?”

    Fusaro is obviously a lot smarter than me. I guess if he wins a prize at the VIC, then who am I to argue? I wonder if Greenblatt would consider the idea “too smart”.

    “Mohnish Pabrai is auctioning off … a life-size bronze bust of Charlie Munger.”


  2. Having done my own research and written up a valuation and analysis article on JACK, I think he is way too optimistic about its future potential, and relies too heavily on “ifs” that have not even been talked about by company management such as the potential spin off of Qdoba.

    I also think its weird that he did not really talk about the risks of the company at all which are substantial in my estimation, and led me to not buy into the company.

    • Excellent Post Dr. Rivera.

      A heavy emphasis on the future and on lots of “ifs” adds risk. Also, the first focus should be on what protects you on the downside.

      • Good to hear you provide feedback, John. So, I guess the only prize you’re going to award Mr. Fusaro is a date with your ex. Poor boy.

        I wonder if over-intellectualism is something of a trap. Investing like you’re trying to outclass David Einhorn or Bill Ackman can get you into trouble. Perhaps we should be more like Peter Lynch when he times his analysts to two minutes. If you can’t explain in a few sentences why the shares are going to go up, then perhaps the opportunity isn’t as great as you thought.

  3. I must admit that I didn’t fully understand his argument. Perhaps boiling it down to its bare essentials and glossing over some of the details so that even a numpty like me can understand, we have this: JACK owned and operated its own chain of restaurants, and is valued as such. It has since switched to a franchising model. These are normally more highly valued by the market, so JACK should get a re-rating boost once the market catches on to the reality. Also, the franchising model will allow the company to expand rapidly and be capital light. Think “MacDonalds”.

    EXCEPT, except … there was an audience question that has given me some doubt. The problem revolves around the property. It seems that JACK, or its potential spinoff REIT, still wants to own the freeholds. So it’s not a true clone of the MacDonalds model.

    Maybe I’d have to understand the argument better.

    I agree with Jason that there are too many “ifs” – I think maybe Fusaro is assuming things that may or may not happen in actuality.

    Damn clever guy, though. David Einhorn clever. Wish I were that clever. I would love to hear the views of others. Maybe I completely missed the beauty of his argument.

  4. My SWAG is very influenced by the previously posted Greenwald videos.

    Does JACK have a durable competitive advantage? No – maybe it’s market share is stable as 5th largest burger chain, but ROC and ROA don’t look like MCD. It has no symptoms of having a DCA. The statement about passing on inflation costs is a dream. If they raise prices, you’ll get your burger and fries from somewhere else. LOTS OF LUCK!

    Therefore we triangulate on valuation using asset value and sustainable earnings power. The value of growth is zero.

    Quick EPV: TTM EBIT 125M, Tax Rate = 36%. WACC = 8%, so EPV = 125*(1-.36)/.08 = $1B. But EV = $1.6B so it looks expensive. But wait, EBIT has been DROPPING since 2007, so there’ really no confidence they can sustain what they earned TTM.

    Quick Asset Value: It’s not liquidation so there may be some intangibles and real estate at historical cost. If I generously DOUBLE book value I get $875M. Again, with EV=$1.6B, way too expensive.

    So at that level alone, I wouldn’t be interested.

    • For asset value I think I should be comparing that doubled book value to marketcap, not EV. Same conclusion though, still too expensive for some pie-in-the-sky story about hidden burrito value.

  5. I wonder if we place too much emphasis on moats when looking a growth opportunities. Let’s not forget Greenblatt’s “Genius” book, page 49: “Monopoly newspapers and network broadcasters were once considered near-perfect businesses; then new forms of competition and the last recession brought those businesses a lit bit closer to earth. … The challenges you face in choosing the few stellar businesses that will stand out in the future will be even harder than the ones faced by Buffett when he was building his fortune. … Finding the next Wal-Mart, McDonald’s, or Gap is also a tough one.”

    BTW John, I’m currently reading Doug Lemov’s book on “Practice Perfect”, as a way of investigating how my learning processes on investing might be improved. Rule 1 is “encode success”. The author is arguing that practice is very important. However, he cautions against saying “practice makes perfect”, and says that “practice makes permanent”. He illustrates this with a footballer’s (soccer) practice at dribbling. The key to improving dribbling is to have slightly bent knees. It is a key that isn’t often taught. The natural instinct is to dribble with straight legs. The point is this: you can do a lot of practice at dribbling, but if your basic pattern is wrong, then you wont improve.

    It’s also gotten me to thinking of a blog post I read about “Nethack”. for those not in the know, Hethack is a computer game based around a random dungeon generation where you meet monsters, fight, cast spells, and so on. The poster commented on someone who was extremely good at the game. Whenever anyone would get a high score, he would go play the game Nethack, and best the pretender. The question is: how? The answer is: the “champion” did not in a sense of having any “brilliance”, genius insight, or “magic” formula, but his style of play was somewhat unexciting but exact. He was careful not to engage in conflict, and retraced his steps once he had retrieved the Amulet of Yendor.

    It’s very interesting, of course, because it makes you think about how one can attain excellence. Unless there’s a bull market, investing is very difficult, and the market stands ever-ready to punish the ignorant.

  6. I think in a lot of ways the company reminds me of McDonalds from a few years back. They are trying to increase franchising, they have Qdoba as a growth play (Chipotle anyone?), and they have company-owned real estate that they could spin-off or sell. However, I’m not so sure the franchise value, customer loyalty and perception for Jack/Qdoba are the same as McDonalds/Chipotle. I for one would prefer at the latter over the former. I’m not sure if others here can chime in regarding how they feel about the food.

  7. I did a little number crunching from figures based on Google.

    Operating margins decreased from 8.5% in 2008 to 6.5% in 2011. Surely, if you were expecting a new more profitable business model, the margins should be increasing. Compare that with McDonalds, which is a whopping 32%.

    Because I’m lazy, I calculated tangible capital by adding PPE, taking of depreciation, and adding net working capital. I get figures of 827 (1518-663+254-282), 869, 900, 968 working backwards form 2011.

    That gives returns on capital (reverse chronological) of 17.1% 13.9% 25.7% 22.2%. So, returns on capital seem to be getting worse rather than better. McDonalds, by contrast, looks to have a return on tangible capital of 32%.

    I don’t think his franchising argument works.


    • If I recall the company owned stores performed well, so it’s uncertain that just having a franchisee-heavy model that better performance will follow. For McD the franchisees actually performed better than the company owned stores. If Jack can get margins more in line with those of other franchise-focused chains and get strong growth in Qdoba they will generate strong cash flows. They seem to be trying to focus on getting economies of scale for markets they’re in, and I think they have room to grow compared to McD since (if I recall correctly) they only have stores in some states.

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