In this segment from the Motley Fool Money radio show, host Chris Hill, Million Dollar Portfolio's Matt Argersinger, and Motley Fool Total Income's Ron Gross talk about Jack in the Box(NASDAQ: JACK). The company's quarterly earnings beat was overshadowed by word that it had hired Morgan Stanley(NYSE: MS) to facilitate a sale of its Mexican food chain. The CEO alleges that the two chains have "different business models" -- but the Fools can only think of one way that statement applies.
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A full transcript follows the video.
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This video was recorded on May 19, 2017.
Chris Hill: Second-quarter profits for Jack in the Box came in higher than expected, but that is not what pushed the stock up this week. Jack in the Box is the parent company of Qdoba, and it is looking to sell its Mexican chain because, in the words of CEO Lenny Comma, "Our valuation is being impacted by having two different business models." What is he talking about, Ron?
Ron Gross: I sense some sarcasm in your tone.
Hill: They're both restaurants! I don't get this.
Gross: I tried to do some digging to figure out what he could potentially mean. First, I looked, maybe the Jack in the Box stores and the Qdoba stores have different business models in the sense that one is franchised and one is not. That is not the case. They're both somewhat equally franchised. Then I went to the conference call, to see if perhaps one of the analysts asked the question to say, "Could you please clarify what that means?" And no one asked that, either. So, I kept digging, and I couldn't find anything, and I'm just left to believe that what he meant was, one is a burger joint, and when is a Mexican place. That's what he meant, I think.
Hill: That's two different cuisines. That's not two different business models.
Gross: Yeah. And for some reason, he believes that's dragging valuation down. What truly dragging valuation down is that Qdoba is just not putting up numbers that are similar to Jack's. The same-stores sales have been declining, and there's weakness, so he wants to spin those off, and hopefully create shareholder value as a result. He actually might be right about that.
Matt Argersinger: I was just thinking, Chris, about what we talked about before the show -- I think he's a little too late on the whole spin-off idea. I think you're right, whenChipotlewas at the trough of struggles with E. coli, and Qdoba sales were still somewhat decent, that would be the time to really raise value. I'm not sure now is the right time.
Hill: Jack in the Box bought Qdoba for $45 million in cash in 2003. They're going to make some money off of whatever they do with this, but, yeah, it really does seem like a year ago was the time to pull the trigger on this.
Gross: For sure. But, it's still a small franchise. There's only 699 Qdobas at the end of the fiscal year. There's plenty of runway out there, as long as they can get their act together, and people continue to want to consume Mexican cuisine.
Chris Hill owns shares of Chipotle. Matthew Argersinger owns shares of Chipotle. Ron Gross has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle. The Motley Fool has a disclosure policy.