NEW DIRECTIONAL PUT PLAYS
Jack In The Box - JACK - close: 78.18 change: -3.59
Stop Loss: 82.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 677 thousand
Entry on August -- at $---.--
Listed on August 31, 2015
Time Frame: Exit PRIOR to October option expiration
New Positions: Yes, see below
It's a burger-eat-burger world out there in the fast-food business. Jack in the Box is small fries compared to its larger rivals like McDonalds (36,258 locations) and Wendy's (6,515 locations). Let's not forget heavy weights like Taco Bell, Burger King, Subway, Dairy Queen, and a handful of pizza chains. JACK only has about 2,200 restaurants but it also has a secret weapon and that is the Qdoba Mexican Grill, a fast-casual restaurant with about 600 locations. Fast-casual restaurant rival Chipotle Mexican Grill has almost 1,800 locations.
Some of that intense competition being felt by McDonalds and Chipotle Mexican Grill is coming from Jack in the Box and its Qdoba brand, which is growing sharply. A majority of their Qdoba franchisees own multiple stores with 10, 20 even 40 stores common. Enterprising business owners don't open additional stores if the original stores are not working. To have so many owners with high numbers of stores suggests the franchise is consistently profitable.
To be profitable they need solid customer traffic, good food and decent margins. Shares of JACK have been one of the best performers on the S&P over the last couple of years because the company has been posting solid earnings and growth.
Customers are trending towards healthier foods and away from the mass produced burgers and fries at McDonalds. Did you know there are 19 ingredients in McDonalds fries? Surely you didn't think they were just potatoes and grease? This trend may not help the Jack in the box brand but it's good news for Qdoba. Restaurants like Qdoba and Chipotle are capitalizing on the healthy food craze.
Management is trying to be shareholder friendly. They have an active share
buyback program and they reduced the share count by 10% over the last few quarters. In their Q2 earnings report (May 13th) the company raised their quarterly dividend by +50%.
JACK reported its Q1 2015 earnings on February 17th. Analysts were expecting a profit of $0.87 a share on revenues of $461.2 million. JACK delivered earnings of $0.93 a share. That's a +24% improvement from a year ago. Revenues were up +4.1% to $468.6 million, above estimates. Their operating margins improved 1% to 19.3%. Management raised their 2015 guidance.
The company did it again in May with their Q2 report. Estimates were for $0.66 per share on revenues of $356 million. JACK reported $0.69 per share with revenues up +5.0% to $358 million. That is a +35.2% earnings improvement from a year ago. Their consolidated restaurant operating margins improved 210 basis points to 20.6%. Plus, management raised their 2015 guidance again.
If we stopped right here the story for JACK looks pretty bullish. They definitely seem to be outgrowing their competition. However, the picture appeared to change in the third quarter.
It looks like growth slowed down a bit too much for the market's liking. JACK reported its Q3 earnings on August 5th. Earnings were $0.76 per share. That beat analysts' estimates by three cents. Revenues only rose +3.2% to $359.5 million, which was essentially in-line with estimates. JACK is still seeing strong same-store sales growth with Q3's SSS up +7.3% for their Jack in the Box brand and +7.7% for the Qdoba business. Management said they are only expecting +3.5-5.5% same-store sales growth for Jack in the Box and +5.0-7.0% growth for Qdoba in the fourth quarter.
Investors must have been expecting more from the company because they sold JACK after its earnings report. Shares corrected pretty fast with a -$10.00 drop in following week. JACK was trying to hold support near $85.00 and then the market collapsed. Last Monday saw shares of JACK plunge to an intraday low of $63.94. The oversold bounce just failed at its 10-dma.
Technically JACK looks broken. After incredible gains over the last couple of years JACK is now in a bear market. The peak in August was a lower high. The breakdown under major support near $85 and its 200-dma was bearish. Now JACK has broken one of its long-term trend lines of support. It looks like JACK has further to fall. Today's low was $78.00. Last Wednesday's low was $77.81. I am suggesting a trigger to buy puts at $77.70.
Trigger @ $77.70
- Suggested Positions -
Buy the OCT $75 PUT (JACK151016P75) current ask $2.35
option price is a current quote and not a suggested entry price.
Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.
Option Format: symbol-year-month-day-call-strike