Why is Jollibee Falling? Coffee Bean and Tea Leaf Acquisition

Jollibee is one of those strong brands in the Philippines. It is said that it is the only fastfood chain that McDonalds can not beat in the Philippines. It has been growing at a very fast rate for years around 12 tp 16% per year. And the investing public and institutions love its stock.

Last year, Jollibee peaked at 45x its earnings. Without any bad news in sight, it started to consolidate and when the announced acquisition of Smash Burger, again made a new high.

But things will eventually go down…

Growth investors might have loved the stocks. But just like what I have said before, great companies can be bad investments. Jollibee is one such company. Its a great company, but its earnings multiple has been so high that its even more expensive than Apple (based on earnings of 15x). Which was suppose to be the most expensive company by market cap at that time.

The patient value investor might have seen this coming. With so high a multiple, it will only take a mediocre news to make the stock go down. With a lot of optimism for the stock, gurus recommending a buy at 300 ( and even kids and moms apparently investing in Jollibee), its drop seems to be inevitable. We just don’t know when.

When Jollibee acquired Smash Burger, it put a dent on its growing earnings. Smash Burger was losing money. Dragging down Jollibee’s net income. Now with a very ambitious leveraged buyout acquisition of Coffee Bean and Tea Leaf, (the biggest one yet) that is also a losing money business, the investors have discounted the fact that the next earnings report would not be favorable.

The risk of buying a great company is that, the investors are optimistic of its future. So when the future does not paint a rosy picture, like that of Jollibee would be losing money by next earnings report, those investors would rush for the exits. And the price to a more sane level.

Currently, Jollibee is sitting at P236 or 32 to 35x earnings. It might still be a premium. Who knows how far this will go down. Or would it recover immediately? I doubt… I’ll just wait for now.

What about you? Are you buying Jollibee at this level?