Morgan Stanley's Fast Food Pair Trade

It’s all about the risk/reward perspective, with shares of Jack in the Box Inc. (NASDAQ: JACK) down 16 percent year-to-date, and Restaurant Brands International Inc (NYSE: QSR) gaining 3 percent during the same period.

Morgan Stanley's John Glass upgraded the rating for Jack in the Box from Equal-weight to Overweight, while downgrading the rating for Restaurant Brands International from Overweight to Equal-weight, citing valuation as a reason for both the moves.

Jack In The Box

The price target is at $89. Analyst John Glass noted that the price target represents an upside of about 40 percent, making the stock “among the most compelling currently in our universe.” Mentioning that the risk-reward is favorable, Glass added that now was a “rare opportunity” to the company’s shares at a 30 percent valuation discount to the last three years.

Related Link: 2 Restaurant Stocks Better Off Than McDonald's

Upcoming corporate actions could lend upside to shares. These actions include the refranchising goals already announced by Jack in the Box and “possible increased leverage compatible with that higher-franchised component,” the analyst said. He added that over time the company’s comp sales would recovery, since the current level of competitive discounting appeared unsustainable.

Restaurant Brands International

The price target is at $43. Glass noted that the shares are currently only about 10 percent away from the price target, following their recent run-up. He wrote, “Our downgrade is a relative value call versus our universe, and especially JACK,” while adding that the stock was the second most expensive among traditional fast foods.

“While we think QSR has so far escaped the burger wars, we do think that lingering concerns about the competitive dynamic and need to re-accelerate unit growth in '16 is not fully priced into shares,” the Morgan Stanley report stated.

While the risk-reward was now more balanced, the long-term fundamental view on the company remained unchanged, Murphy added.

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