FOLLOW THE MONEY – 9/15/26
Treasury Secretary, Scott Bessent, seems to have already forgotten the trading principles that contributed to his personal investment success. My overview is that it is a lot easier to profit from the financial distortions created by others than to put in place policy capable of solving near impossible problems. After recently spending $10B to stem the decline of the Japanese Yen, the Japanese being the largest holder of US Treasuries, on August 19th the Treasury announced an increase in their purchases of 10- and 30-year US Treasuries from $2B to $4B per “operation”, and just days ago that was raised to $6B. While Bessent makes no secret of his desire to stem the rise in long term interest rates, his statement days ago that “I am the House” is telling in terms of self-deception. You heard it here first. A buyer of “anything”, when providing a support price higher than the natural supply/demand relationship would indicate, can defend the price only as long as they continue to bid. The sellers will keep coming, and the buyer must be ready to BUY IT ALL. Bessent can’t buy all the Yen or Treasury Notes, so he would do best to get out of the way. He and Stanley Druckenmiller, the legendary macro-trader, worked with George Soros when they made billions in 1992 by shorting the British Pound. We think it likely Druckenmiller and Soros are currently short the Yen as well as US Long Bonds.
Jersey Mike’s (JMKE) started trading publicly on July 30th and has immediately (and appropriately) been considered one of the “best of breed” publicly held restaurant companies. It happens there is currently “carnage” among the group of most highly valued (based on EBITDA multiple) restaurant names, namely CAVA Group (CAVA), Dutch Bros (BROS), Kura Sushi USA (KRUS), Chipotle (CMG) and Wingstop (WING). We consider this “fab five” as comparables, all with unit level cash-on-cash returns of at least 35-40%, annual unit growth of at least 10% (slightly lower at CMG), earnings and EBITDA compounding at 15-20% annually or more, 4 of the 5 virtually debt free. While JMKE at $22/share trades about 24x TTM (to 6/30/26) Adjusted EBITDA, the five sited comparables are: CAVA at 34x, BROS at 23x, KRUS at 23x, CMG at 20x and WING at 17x. CAVA stock is down over 60% from its high, BROS down over 45%, KRUS down over 60%, CMG down over 40%, and WING down over 70%. We consider that KRUS, CMG & WING have provided sufficient food for thought (no pun intended) to bring their valuations to much more reasonable levels. CAVA and BROS have provided no material fundamental slowdown or question mark and are suffering merely from prices previously implying perfection or better.
In terms of evaluating franchisor JMKE’s prospects, we note that four of the “fab five” consist primarily of company operated locations, WING being the only franchisor. This is important because investors tend to provide higher valuations to “free cash flow”, “asset light” franchising companies so JMKE could have a higher valuation than the “fab four” (ex-WING). Studying therefore the franchising operation of JMKE, it seems worth highlighting that Adjusted EBITDA amounts to an abnormally high 69% of Revenues, after stripping out franchisee advertising contributions, which flow through revenues and expenses as an approximate “wash”. It turns out that JMKE receives, on top of a 6.5% royalty ($143M for 26 weeks ending 6/30/26), “other revenue ($117M), which primarily includes supplier program payments, technology fees, initial franchise fees and upfront development fees in connection with franchise and area development agreements, and gift card income.” While other franchising companies have similar revenue sources, the comparable EBITDA as a percentage of Revenues, ex- advertising, is about 45% at WING, 28% at Domino’s, 33% at Restaurant Brands, 44% at Yum Brands, and 48% at McDonald’s. Offsetting this apparently larger burden on franchisees, however, there does not appear to be visible resistance, since Jersey Mike’s 1600-unit development backlog is 90% from existing franchisees and if sales continue northward, that should continue to be the case.
JMKE management’s description of future opportunities includes some form of the initiatives that have helped WING, CAVA, BROS and the other public success stories. Investors love new names, searching (most of the time in vain) for the management team that does not stumble, and can overcome macro-economic challenges as well. In this case, CEO Morrison made a lot of money for WING investors and franchisees and will likely be given the benefit of the doubt.
In conclusion, notwithstanding our desire to learn more about why JMKE’s EBITDA margin is so much better than franchisor peers, it won’t matter if systemwide same store sales (currently up 2-3%) is at least sustained, especially if the rate of increase (the 2nd derivative) should rise. Remember that each of the fab five, down so much from their highs, went up a lot before they came down to earth. My belief is that Morrison and Co. is likely to show progress, at least in the short to intermediate term, so I’m currently inclined to be long JMKE.
Roger Lipton
