Is Jack in the Box’s Share Buyback Program a Good Deal for Shareholders?

The Presentation inside:

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Is Jack in the Box’s Share Buyback Program a Good Deal for Shareholders? By Sean O’Reilly

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Buffett on Buybacks “There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.” -- Warren Buffett, 1999 Berkshire Hathaway Chairman’s Letter to Shareholders

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A $200 Million Announcement On September 21, 2015 Jack in the Box announced a new $200 million share repurchase program This was part of JACKs’ recent efforts in recent years to “return capital to shareholders” Follows $317 million worth of share repurchases so far in FY 2015 Company initiated a dividend in 2014 Is this the best use of shareholder’s capital?

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A Solid Third Quarter Reported 3rd quarter FY 2015 results on August 5, 2015: Earnings per share grew 16.9% year over year to $0.76 Revenue growth was lackluster, rising just 3.1% Same store sales growth compared to the same period last year was within expectations: Jack in the Box Restaurants: 7.3% increase Qdoba- 7.7% GAAP operating earnings per share guidance for the full year was raised slightly

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Why the drop? Stock fell 6% on the earnings news, and continued to slide from $97 to a recent $75 Forward guidance was the culprit: Previously guided for 50 to 60 new Qdoba restaurants this year, this was lowered to 40 to 45 Full year Same-store sales at company-owned Jack in the Box locations projected to grow 5.0 to 5.5%

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What Would Warren Do? Is JACKs’ latest share repurchase program a prime example of intelligent capital allocation, or a waste of shareholders’ money ?

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What Would Warren Do? There are four possible uses for shareholder’s capital: Capital investments Dividends Share repurchases Acquisitions

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Not JACK’s First Buyback Rodeo

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JACK’s buyback record is questionable Buyback’s made in FY 2012 were beneficial in light of current share price Company has spent even more on buybacks as share price has tripled Suggests the recent $200 million buyback is being made out of habit

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Best use of shareholders’ capital? JACK currently trades for 25 times forward earnings estimates and 20 times trailing free cash flow Analysts estimate earnings per share growth of 12% per annum through fiscal year 2019 JACKs’ return on equity has averaged 18.7% over the last five years Share repurchases and dividends are greater than free cash flow

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Best use of shareholders’ capital? S&P 500 Index’s current P/E ratio stands at 18.96 Modestly lower than JACK JACK earnings growth is good but not astronomically higher than corporate America Would you want to own LMT at current valuation or the S&P 500?

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Foolish Bottom Line Buyback is expensive based upon lofty valuation of JACK shares Shareholders better served by investing free cash flow in further store expansion Fast-growing Qdoba chain a strong candidate Latest buyback program being made for the sake of appearances, not after careful analysis

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