JACK vs MCD - A Death Match
While we are waiting for “earnings season” to begin once again, let’s go back and review some basics.
When I started writing in late November 2022, I postulated that the most basic skill an analyst could learn was to compare two companies, and choose the best investment.
This idea was part of the CFA exam starting the 1960’s. I am so old that my CFA “equity question” was Sears vs JC Penny’s (the real answer was, they both went bankrupt). The classic was Merck vs Ford in the early 1990’s.
My basic idea is that by doing literally thousands of these comparisons, you can build a “model portfolio”. We can learn some shortcuts to make the process a little more manageable, but let’s do the basics first.
Let’s start with one of the easiest industries to understand, the restaurant business.
Let’s start with Jack in the Box - JACK - $45, as the “king of the hill”, and compare JACK to industry giant McDonald’s - MCD - $299
Let’s compare the companies on 10 important questions, in order on importance:
Which company is easier to understand? Please note we start with a qualitative question, not a quantitative question. In my judgement JACK is easier to understand than MCD. I would say that 80% of the time a company with a market cap of $800 million like JACK will be easier to understand than MCD’s market cap of over $200 billion. It is very important that JACK has a recent, well done, investor day presentation. Size is not only answer to this question. MCD’s heavy reliance on international markets for its growth, also makes it more complicated. Advantage JACK.
Which company sells at a lower valuation? You do not have to be a rocket scientist to calculate that JACK at 7x estimated 2024 earnings is cheaper than MCD at 25x earnings. This comparison will often be more difficult, but in this case it is obvious. Big advantage to JACK.
Which company has greater growth prospects? I would argue that JACK has greater growth prospects. JACK is still growing geographically, for example they are just getting started in Florida. Reasonable people might disagree, they would fear that JACK’s margins will be squeezed. If you asked me to bet on which company will grow earnings faster over the next 10 years, I would bet on JACK. I realize that is a minority opinion, but trying to grow a $200 billion dollar company is also difficult. Small advantage to JACK.
Which company has more exposure to change/variability? Very few investment professionals would have this question in their top 5, but I strongly believe this question is important. Most managers would in fact value stability over change. I want the companies I invest in to be doing new things. I value JACK’s acquisition of Del Taco, and their ability to attract new franchisees. I despise big and boring. Significant advantage to JACK.
Which company has a better balance sheet? It looked like a blowout for JACK, but here is the reason you might choose MCD. With interest coverage of just 3x JACK’s balance sheet is just barely acceptable. The structure of JACK’s debt is also OK, but not great. What constitutes acceptable is a difficult and qualitative decision. We will review “minimum standards” in a separate post. Large advantage to MCD.
Which company has lower expectations? MCD has 24 buys and 13 hold sell/holds, this is about average for big cap stocks. JACK has only 8 buys and 14 sell/holds. Yes, I am a cynical bastard. The fewer Wall Street buy recommendations the better. Not everyone would agree with this question, but it is central to my investment approach. Big advantage JACK.
Which stocks is closer to its 10-year low, and further from its 10-year high? MCD has risen from its low of $93, to near is current all-time high of $300. JACK has fallen from its all-time high of $120, to near its 10-year low of $45. The idea of buy low and sell high is simple, yet difficult to do. Again, most investors do not ask this question, but I do. Enormous advantage to JACK.
Which company is owned by value investors I respect? MCD is not owned by any value investors I respect. JACK is owned by Victory Capital and Allspring Special Small Cap (a new addition, but take a look, it is a great portfolio). JACK is also 6% owned by Biglari Capital, the same firm the owns Steak n Shake. Large advantage JACK.
Which company is better managed? This is another tough and qualitative call. I think we can agree that MCD is better managed, but again JACK’s management is above the minimum standard. Many investors overweight the management factor. It is on my list, but it is not the most important. Advantage MCD.
Which company has been better at buying back stock? MCD has been good for a big cap, reducing share count from 1 billion to 750 million, but this has slowed recently. JACK has been a champion of share buyback, and it is an important part of the company’s culture. Small advantage to JACK.
This comparison was not really close, JACK is the easy winner, but the balance sheet almost tipped the competition to MCD. Other comparisons will be much more difficult.
Coming next JACK vs Wendy’s.