Q. I am concerned about the future of my shares of Jack in the Box Inc. in light of the weak economy. Can you advise?
A. This restaurant chain named for a child’s toy must cope with the very grown-up issues of an economic downturn: unemployment, rising commodity costs and fierce competition.
To overcome these obstacles, it is constantly marketing new menu items and meal combinations. Its strategy for the past year has been to upgrade its restaurants and to intensify quality control in both service and food.
It operates and franchises 2,220 Jack in the Box fast-food restaurants in 19 states, as well as more than 500 Qdoba Mexican Grill fast-casual restaurants in 43 states and the District of Columbia.
Improvement efforts appeared to pay off with increased same-store sales in the recent third fiscal quarter:
• Its namesake-store sales were up 4.7 percent, and the company now forecasts a 2 to 3 percent gain for the fiscal year.
• Qdoba sales increased 5.1 percent, with a 5 to 6 percent fiscal-year rise predicted.
Shares of Jack in the Box (JACK) are down 3 percent this year following last year’s 7 percent increase. Fiscal third-quarter earnings fell 23 percent on rising costs and the expenses associated with its revitalization strategy.
Confidence in this stock depends on investor confidence in the firm’s ability to weather the economy and become more of a standout among its larger rivals.
Moody’s Investors Service recently downgraded ratings on certain portions of the chain’s debt. It said the outlook is stable and commended its brand recognition, size and liquidity. But it cautioned that, in the intermediate term, “soft consumer spending and a persistently high level of promotion continue to negatively impact operating performance.”
Consensus analyst opinion on Jack in the Box shares is “hold,” according to Thomson Reuters, consisting of four “strong buys,” one “buy,” seven “holds” and two “underperforms.”
Launched in San Diego in 1951, Jack in the Box presents as its fictitious “founder and CEO” a wisecracking actor wearing a round Jack in the Box head in humorous regional TV commercials.
In the real world, the chairman and CEO since 2005 has been Linda Lang, its former COO who is directing the upgrade efforts.
Earnings are expected to decline 4 percent this fiscal year and increase 23 percent the following fiscal year, according to Thomson Reuters. The five-year annualized growth rate is forecast to be 11 percent compared to 16 percent projected for the restaurant industry. 2010 Financial report (fiscal year ended September 2010): Net sales: $2.3 billion, Net income: $70 million.
Q. I would appreciate some word about the stock of American Tower Corp.
A. Growth of this profitable cell-tower operator seems assured because of the rising global demand for high-speed data and on-demand video services.
Major customers of its wireless and broadcast communication sites are wireless carriers compelled to upgrade networks to keep up with their competition.
Already boasting more than 38,000 tower sites in the U.S., Latin America, India and Africa, American Tower continues to acquire more. Recent deals included sites in Ghana, South Africa and Colombia -- countries with relatively low wireless penetration and considerable potential.
American Tower Corp. (AMT) shares are up 4 percent this year following a gain of 20 percent last year. Second-quarter earnings were up 16 percent as Verizon and AT&T continued to invest in their wireless networks by adding equipment and increasing their site density.
A proxy statement has been filed with the Securities and Exchange Commission by American Tower to convert its corporate status to a real estate investment trust (REIT). That structure provides tax advantages for companies that have most of their assets and income in real estate and pay out most of their taxable income in dividends. A special stockholder meeting will be held in the fourth quarter to consider the change for next year.
Moody’s Investors Service has said American Tower will remain investment grade after the conversion.
Separately, there is a tax concern: American Tower received an SEC subpoena for tax-reporting and accounting documents from 2007 through the present. The firm said it will cooperate fully with the request. In an earlier filing, the company said the manner in how it handles uncertain tax benefits could potentially be challenged by tax authorities.
Consensus analyst recommendation on the volatile shares of American Tower is “buy,” according to Thomson Reuters, consisting of seven “strong buys,” 13 “buys” and two “holds.”
After joining the company as COO in 2001, James Taiclet became CEO in 2003 and chairman in 2004. He improved prospects by acquiring rival SpectraSite in 2005 and has bolstered the firm’s balance sheet by reducing debt.
American Tower has the industry’s longest contracts, strong cash flow and an aggressive stock buyback program. Nonetheless, it is susceptible to reduced business from wireless-carrier consolidation (such as AT&T acquiring T-Mobile), possible shifts in wireless demand and inherent overseas risks.
Earnings are expected to increase 6 percent this year versus 20 percent predicted for the telecommunication services industry, according to Thomson Reuters. Next year’s projected 40 percent gain compares to 19 percent forecast industry-wide. The five-year annualized earnings gain estimate is 18 percent versus 17 percent expected for its peers. 2010 Financial report: Net sales: $2 billion, Net income: $373 million.
Q. Does T. Rowe Price Capital Appreciation Fund live up to the good things being said about it?
A. It is a fund with a distinctive portfolio and a decent track record.
More than 70 percent of its holdings are in stocks, and the remainder is a combination of convertible bonds, traditional bonds, bank loans and cash.
The $11.7 billion T. Rowe Price Capital Appreciation Fund (PACLX) has a one-year annualized return of 3 percent that ranks at the midpoint of moderate allocation funds. Its five-year annualized return of 3 percent places it in the upper one-fifth of its peers.
“Its aim is to beat the Standard & Poor’s 500 with less risk over time and it has actually done that,” said Greg Carlson, mutual fund analyst for Morningstar Inc. in Chicago. “While sensitive to the equity markets through its stock holdings and convertible bonds, it is less sensitive to them than an all-equity fund would be.”
David Giroux has run the fund since 2006, the first year as a co-manager and the rest by himself. He was previously an analyst of industrial stocks.
The stocks he prefers are those that have been beaten down in price by the market and that feature strong yields. He is assisted by the T. Rowe Price team of analysts, especially in selecting the fixed-rate holdings.
1”Giroux is impressive and has generated a really good record in this fund,” said Carlson. “It can be considered a core holding for an individual investor.”
Compensation of T. Rowe Price portfolio managers is based largely on fund performance. In addition, according to filings Giroux also has between $500,000 and $1 million of his own money invested in the fund.
Financial services, industrial materials and consumer goods each represent about 15 percent of its stock portfolio. Its largest stock holdings include PepsiCo Inc., Thermo Fisher Scientific Inc., Danaher Corp., Pfizer Inc., U.S. Bancorp, Procter & Gamble Co., United Technologies, Time Warner Inc. and TE Connectivity Ltd.
This “no-load” (no sales charge) fund requires a $2,500 minimum initial investment and has a low annual expense ratio of 0.98 percent.
Q. I am under financial pressure. Please advise what to think about borrowing money from my individual retirement account.
A. Since borrowing from a retirement account is never a good idea because it affects your future, it should be one of your last considerations.
You can withdraw Roth IRA contributions free of tax or penalty, no matter what your age, because you already paid taxes on that money.
However, withdrawals from a traditional IRA are a different matter.
The IRS permits you to take money out for 60 days. If you do not replace it within that time period, you must pay taxes plus a 10 percent penalty if you are under 59 1/2 years old. If you are taking out traditional IRA money to help pay for a first-time home purchase, the time period extends to 120 days.
“A better option is borrowing from a company 401(k) retirement account,” said Angela Thomson, certified financial planner and president of Coastal Financial Planning Inc., Lincoln, R.I. “You have four years to pay that money back and can borrow 50 percent of the value of the 401(k), up to $50,000.”
Q. Over the long run, meaning 10 years or more, what is considered a good investment rate of return? I am confused by the figures and advice I have seen.
A. There is no one right answer because returns in any 10-year period are dictated by the prevailing interest-rate and economic environment. For example, Treasury-bill rates and expectations for investment returns were high in the 1980s but are low today.
“Average rate of return is fiction because we don’t get year-after-year average return,” said Marilyn Capelli Dimitroff, certified financial planner and president of Capelli Financial Services Inc., Bloomfield Hills, Mich. “It is more important to figure the rate of return you will need to reach your goals without taking excessive risk.”
Sometimes investors focus on hitting a specific return and take on too much risk to achieve it, she warned, when in reality they really didn’t need it to meet their goals.
Choose wisely: While stocks are most likely to exceed inflation, many investors set unrealistic expectations for them. Bonds can beat inflation, but higher-return bonds require greater risk. Gold is volatile, real estate has rough patches and bank certificates provide safe but modest returns.
Editor’s Note: Andrew Leckey answers questions for Bull & Bear readers only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, Ariz. 85004-1248, or by e-mail at andrewinv@aol.com.
