Baird Upgrades Jack In The Box To Outperform, $95 Price Target

Baird has upgraded Jack in the Box Inc. (NASDAQ: JACK) to Outperform after the company's "positive" investor meeting suggests that the stock has "plenty of room to run over the next 12-24 months."

The stock's upside potential comes from its transition to a leaner, more highly franchised business model yielding consistent operating results, a higher ROIC, and healthy returns of capital to shareholders.

"We acknowledge risks related to near-term comps assumptions (particularly for FQ4), but we believe JACK has a solid game plan to spur better momentum in F2017 and beyond, and we think any short-term noise on comp trends ultimately will be overshadowed by the positives related to the transition to a more highly franchised business model," analyst David Tarantino wrote in a note.

Related Link: Oppenheimer Raises Jack In The Box Price Target To $91

The company unveiled plans to increase the franchised mix for Jack in the Box to as much as 95 percent (previously targeted 90 percent plus) by F2018 while correspondingly reducing G&A to 2.0-2.5 percent of system sales (well below prior 3.0 percent indication).

The company also raised the debt-to-EBITDA leverage ratio to at least 4X from 2.9X.

"The combined annualized EPS accretion from these moves could approach $1 (including impact of additional leverage/buybacks)," Tarantino said.

JACK expects to achieve mid-teens annual EPS increases in F2018-2020, supported by growth for JIB (comps +2.5-3.5 percent, system units +1-2 percent), Qdoba (comps +4-5 percent, units +10-12 percent), and buybacks.

In the near-term, the company is confident that planned JIB initiatives (including "Burger X" LTO in FQ4) can help to spur better momentum exiting fiscal 2016.

"While we still see some short-term risk, we think ongoing structural improvements ultimately will lead to better momentum as comparisons ease in F2017," Tarantino noted.

The analyst also raised F2017 EPS estimate by $0.40 to $4.40, while consensus is at $4.00. The analyst also raised the price target to $95 from $80.