Teenage Mutant Ninja Portfolio: Pizza Power!

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Growing up, my favorite Saturday morning cartoon was Teenage Mutant Ninja Turtles. I used to sing along to the theme song, practice my ninjutsu moves around the house, and I was always sure to eat plenty of nutritious pizza.

The Turtles themselves were a very diverse group. At least as diverse as any four New York City sewer dwelling anthropomorphic turtles with superb ninja skills can be: there’s Leonardo, the leader of the group and by far the most obedient; Donatello, the nerdy science whiz; Raphael, the aggressive bad boy, who happens to have a Brooklyn accent for some reason; and Michelangelo, the laid back surf kid, who fancies himself a Southern California beach bum.

There is one thing that brings them all together - pizza.

If we were a society of ninja turtles the two biggest industries would likely be throwing stars and pizza. Since there aren't very many publicly traded companies that sell throwing stars, I’ll look at a few pizza companies, do a taste test, and determine which one the Turtles would invest in.

The Competition

The three largest pizza chains in the U.S. are Yum! Brands’ (NYSE: YUM) Pizza Hut, Domino’s Pizza (NYSE: DPZ), and Papa John’s International (NASDAQ: PZZA). Each of these companies has seen fantastic results as of late, and continue to grab market share from small local pizzerias. Pizza Hut saw same store sales growth of 6% in its most recent quarter year-over-year. Domino’s and Papa John’s saw similar improvements, posting 3.3% and 2.5% North American SSS growth, and 5% and 6.9% international SSS growth, respectively.

Pricing

Price is a key factor in both pizza and stock purchases. All three of these companies are priced similarly in terms of forward P/E multiples. Both Domino’s and Papa John’s stock are priced around 17.5 times forward earnings, and the market prices Yum! slightly higher at around 19 times expected earnings. However, they all trade at a PEG of about 1.65.

Smell

Another important factor in choosing a pizza is the smell. Any Ninja Turtle can be easily distracted by the smell of a great pizzeria. They’ll drop anything they’re doing, even fighting evil foot soldiers, and patronize a great smelling pizzeria.

So which of these companies wins the smell test?

Domino’s and Yum! posted excellent operating profit margins over the last year, with Domino's margin at 16.53% and Yum!'s margin at 16.25%. Unfortunately, Papa John’s is stinking up the joint with a margin of just 7.54%. Additionally, Domino's has had an excellent return on assets over the last twelve months of 38.55%. This far exceeds Yum! and Pappa John’s, who’ve returned 15.12% and 15.75%, respectively.

Ninja Pizza

The Turtles have a tough choice, but I think Splinter would advise them to choose Domino’s Pizza. (Unless Ninja Pizza is a real option, like in an early episode of the original cartoon series).

Domino’s is operating more effectively and efficiently than the competition. Much like a ninja, the company has learned to work with what it has and outsmart the competition. The company is a leading innovator and an aggressive marketer. It seems like CEO Patrick Doyle is on TV every few months telling me about the next best thing in pizza.

Most recently, the chain introduced its pan pizza in an effort to compete with Pizza Hut’s dominance in the niche. Considering one out of every five pizzas ordered is a pan pizza, taking even just a slice of the market will improve the top and bottom lines for Domino’s.

Additionally, Domino’s continues to grow abroad. Where Yum! saw disappointing results internationally, as well as decelerating growth, Domino’s saw good international growth and looks to continue expanding its locations abroad next year at a rate of 15% to 30% faster than the previous twelve months. Demand for pizza is growing abroad, especially in Asia, and Domino’s is ready to swoop in undetected and take customers right out from under Pizza Hut … just like a ninja.

Overall, Domino’s potential for growth looks strong. As every ninja knows, the growing process is never complete, and I’m sure the Turtles see a bit of themselves in Domino’s Pizza … or do they see a bit of Domino’s pizza in themselves?


adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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