Is Jack in the Box the Most Overpriced Stock in America?

We are living in the age of overpriced stock when companies like Tesla Motors (NASDAQ: TSLA) trade at several hundred dollars a share based on little more than hope. Yet in this environment there are some that are so overpriced they stand out.

Jack in the Box (NASDAQ: JACK) is a perfect case in point. This tacky food outlet may have become one of the most overpriced stocks in America for reasons I cannot begin to figure out.

Some of its numbers are absolutely awful; for instance the 195% return on equity investors received on June 30, 2016. That’s right folks, Jack lost 195% of its value in six months. What’s worse is that it lost that value in just six months, in December 2015, it was delivering a 121.5% return on equity. By June that had fallen by 195%.

Is Jack in the Box Really Worth $94 a Share?

Okay this looks like a classic case of Mr. Market being off his meds, but is there anything at Jack to justify those fluctuations or the $94.39 a share it was trading at on October 7, 2016? In a word answer based upon the financial numbers: no?

Some of the highlights of the Jack in the Box financial numbers for second quarter 2016 include:

• $1.558 in revenue.

 

• $115.23 million in net income.

 

• A free cash flow of $42.57 million.

 

• Assets of $1.292 billion.

 

• Cash and short-term investments of $6.647 million.

 

• $208.43 million.

There’s absolutely nothing here to justify the $94.59 a share; even though JACK did deliver good profit margin of 8.18% and a PE ratio of 28.66. Those numbers are why I tend to ignore PE ratios and profit margins, they can be very high and a company can still be making no money.

Jack in the Box is making a little money but it is not making the kind of money to justify $94 a share.

McDonald’s is Worth It, Jack is not

Not even the dividend yield of 1.27% looked that appetizing at JACK. Shareholders received a whopping big dividend of 30¢ a share on August 12, 2016. Meanwhile McDonald’s (NYSE: MCD); which is also overpriced, at least paid a dividend of 94¢ a share. That gave McDonald’s a dividend yield of 3.13% on October 7, 2016.

McDonald’s was trading a share on $113.64 on October 7, 2016, but it had revenues of $25.13 billion, a net income of $4.704 billion, assets of $33.15 billion, $3.128 billion cash and short-term investments and $6.32 billion in cash from operations at the end of second quarter 2016.

It is possible to justify the share price for McDonald’s but not for Jack in the Box. JACK’s numbers also raise serious questions about “quality burger” chain Shake Shack (NYSE: SHAK).

Like Jack in the Box, Shake Shack occupies a fast food niche and it makes very little money. Shake reported a net income of $7.534 million and a free cash flow of $3.538 million on June 30, 2016 despite a profit margin of 4.96%. It also reported revenues of $224.97 million.

The problem is that many fast purveyors including McDonald’s, Shake Shack, JACK and Chipotle Mexican Grill (NYSE: CMB) seem to have an almost supernatural hold over investors’ minds. These brands have high valuations because investors are willing to shell out big money for their stock, not because they are worth it.

Hope and Hype in the Fast Food Jungle

My guess is that we’ll see a total collapse of stock value at one of these brands in the near future. That will occur because with the exception of McDonald’s (where revenues are in freefall) all of these stock valuations are based on hope and hype.

This explains why investors in fast food are constantly talking about their favorite chain’s latest gimmick such as McDonald’s “breakfast all day.” That’s actually a pretty desperate move, what Mickey D’s was really saying there was; “our burgers are so lousy we have to sell something else to attract customers.”

An even greater indication of desperation is Jack in the Box’s decision to offer delivery to 3 a.m. in the morning with help from a startup called Door Dash in San Francisco. That’s basically saying: “the only way we can get people to buy our food is to sell it when every other restaurant in town is closed.”

Perhaps these companies should work on improving their food and forget about the gimmicks.

What we can learn from Jack in the Box’s Return on Equity

Jack in the Box does have an important lesson to teach investors through its return on equity. That lesson is “stay away from fast food stocks unless you want your money to go on a roller coaster ride.”

JACK demonstrates that fast food is no longer a value investment. Instead it has become a risky speculative play; that income and long-term investors need to avoid like the plague.