The Motley Fool, 9/11/97: The Daily Double

Thursday, September 11, 1997

Foodmaker
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Phone: 619-571-2121
Website: http://www.foodmaker.com
Price (9/10/97): $20 11/16

HOW DID IT DOUBLE?

Jack's back -- with a double cheeseburger to go. Four years removed from the infamous and tragic Jack in the Box E. coli incident, when many questioned the company's future existence, Foodmaker has completed a dramatic, and until recently, unheralded turnaround.

For investors, the word "sourdough" -- the bread of the signature Sourdough Jack hamburger -- may seem like an oxymoron. They have been making some serious dough and are probably anything but sour at the company's performance.

BUSINESS DESCRIPTION

Foodmaker operates and franchises 1,280 Jack in the Box restaurants, primarily in the West. With more than $1 billion in annual revenues, the company has 26,000 employees and is headquartered in San Diego.

FINANCIAL FACTS

Income Statement
12-month sales: $1061.3 million
12-month income: $31.5 million
12-month EPS: $0.80
Profit Margin: 3.0%
Market Cap: $824.8 million

Balance Sheet
Cash: $89.9 million
Current Assets: $155.8 million
Current Liabilities: $178.6 million
Long-term Debt: $396.0 million

Ratios
Price-to-earnings: 25.9
Price-to-sales: 0.78

HOW COULD YOU HAVE FOUND THIS DOUBLE?

The June quarter was the company's tenth consecutive reporting period with positive same-store sales. The same cannot be said for MCDONALD'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %>, where per store averages dipped for the quarter and have been sluggish in general. It is an amazing streak in the fickle burger war world, but one that has gone mainly unnoticed. Back in January after completing its eighth consecutive quarterly gain in same-store sales, the stock was still trading in the single digits.

Since then the shares have been "Jacked" up. Same-store sales gains are critical in the fast food industry, especially for a company like Foodmaker. The 7.7% rise in csame-store sales last quarter helped the company report yet another solid showing. The streak of success, which has trickled nicely on down to the income statement, has won over analysts in the process.

In May, Everen Securities initiated coverage of Foodmaker, and Robertson Stephens followed a month later. While the stock had already risen fivefold since 1995, both analysts were optimistic about the future. They backed Jack.

WHERE TO FROM HERE?

There were some flashbacks to 1993 last month when Hudson Foods had to recall 25 million pounds of ground beef because of E. coli contamination. This time it was Burger King that faced the music, and Foodmaker was quick to let the world know it had learned its lesson.

"The fact is, not all hamburger meat is created equal," said Foodmaker's VP of Quality Assurance, Dr. David Theno, in a timely press release. The release went on to state that Foodmaker's meat now boasts the lowest microbial count in the industry, all at a cost of less than a penny a pound.

It was the perfect way for the company to nip in bud any logical rehashings of the 1993 tragedy that ultimately left four children dead from tainted Jack in the Box hamburgers. In one fell swoop it not only showed that the company had learned from its mistakes, but proclaimed that nobody takes the issue as serious as they do and there is no burger safer than theirs.

That settled, what about the stock? The company has now blown past Everen's long-term price target of $18 a share. In assessing Foodmaker, which now seems fairly priced at almost 20 times next year's earnings estimates of $1.06 per share, one has to consider the restaurant's chances to best the projections.

Foodmaker's financial strength has given it some fiscal muscle. Last month the company announced that it would be retiring $50 million of debt. The savings on interest payments alone would prop up earnings by about 10%. There is also the sale-store sales streak -- almost Cal Ripken-esque by fast food standards -- which, if maintained, should continue to produce solid top-line results.

All of this may ultimately lead to stronger earnings but probably not strong enough to substantiate another double in the short term. In any event, Jack is back -- and he won't back down.

- Rick Aristotle Munarriz, [email protected]

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