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What to Expect from Jack in the Box’s Q2 Earnings

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Amid the global sell-off due to concerns about COVID-19, Jack in the Box (JACK) stock fell to a low of $16.81 on March 18. Since then, the stock has made a significant recovery. The stock rose to $65.83 at the end of May 12, which represents a rise of 291.6%. On April 15, the company’s management announced that its SSSG for the quarter has declined by 4.2% amid the COVID-19 pandemic. The company also announced that it would reduce marketing fees and postpone its rent collection from its franchisees. These announcements and the clearance of the $2.2 trillion stimulus package by the Trump administration drove the company’s stock price.

Despite the surge, Jack in the Box is still trading 29.3% lower than its 52-week high of $93.12. Meanwhile, the company will likely report its second-quarter earnings, which ended on April 12, today after the market closes. Let’s look at analysts’ expectations for the company.

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Analysts expect Jack in the Box’s revenue to fall

For the second quarter, analysts expect Jack in the Box to report revenue of $211.1 million—a fall of 2.1% from $215.7 million in the second quarter of 2019. The negative SSSG will likely drag the company’s revenue down. For the first seven weeks of the quarter, the company reported a strong SSSG of 5.2%. However, as the outbreak intensified, Jack in the Box’s SSSG declined to a negative SSSG of 17% for the last five weeks of the quarter. The decline dragged the company’s SSSG for the quarter down to a negative 4.2%. Due to social distancing guidelines, Jack in the Box had closed its dine-in space and only operate its delivery and take-out services.

Meanwhile, adding new restaurants could offset some of the revenue declines during the quarter. By the end of the first quarter of fiscal 2020, the company operated four more franchise restaurants compared to the second quarter of fiscal 2019 at 2,107. Meanwhile, the unit count of company-owned restaurants was flat at 137 units. Adding restaurants and reopening restaurants during the second quarter could offset some of the revenue declines.

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JACK’s EPS to decline by double-digits

Analysts expect Jack in the Box’s EPS to be $0.66 during the quarter—a fall of 33.8% from $0.99 in the second quarter of 2019. Lower sales, a lower EBIT margin, increased interest expenses, and a higher effective tax rate could lower the company’s EPS during the quarter. However, the decline in the number of shares outstanding could limit the EPS decline.

Analysts expect Jack in the Box’s EBIT margin to decline from 22.3% in the second quarter of 2019 to 19.7%. The sales deleverage from negative SSSG and higher operating expenses could lower the company’s EBIT margin. Meanwhile, the company’s interest expenses will likely rise from $13.4 million to $15.7 million. The effective tax rate could rise from 25.0% to 25.8%.

Valuation multiple

As of May 12, Jack in the Box is trading at 24x analysts’ EPS expectation of $2.74 for fiscal 2020 and at 16.7x analysts’ EPS expectation of $3.94 for fiscal 2021. These expectations represent a YoY decline of 36.9% in 2020 and YoY growth of 43.5% in 2021. At the current levels, the company’s valuation multiples look expensive.

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Analysts’ recommendations for Jack in the Box

Analysts had mixed opinions after Jack in the Box’s management provided an update on its operations on April 15. Wedbush, SunTrust Robinson, and Cowen raised their target prices. Also, BTIG upgraded the stock from “neutral” to “buy.” However, UBS, Wells Fargo, and Oppenheimer lowered their target prices.

Overall, Wall Street favors a “hold” rating for Jack in the Box. Among the 18 analysts, 50% recommend a “hold” rating, 38.9% recommend a “buy” rating, and 11.1% recommend a “sell” rating. As of May 12, analysts’ consensus target price was $62.25, which represents a potential fall of 5.4% from its closing price on May 12.

YTD stock performance

So far this year, Jack in the Box has lost 15.6% of its stock value. The company has underperformed its peers and the border equity market. YTD, McDonald’s (NYSE:MCD), Wendy’s (NASDAQ:WEN), and Shake Shack (NYSE:SHAK) have declined by 10.7%, 6.4%, and 14.7%, respectively. Meanwhile, the S&P 500 Index has fallen by 11.2% during the same period.

Jack in the Box’s stock price has risen too quickly. The company’s valuation multiples also look expensive. So, I think that investors should wait until the company reports its second-quarter earnings before making any investment decisions.

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