Pizza Is Delicious for Consumers and Investors Alike
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the past five years, Papa John’s International (NASDAQ: PZZA) has been on the rise, climbing from around $28 per share to $70 per share. This has resulted in a sweet annualized return of more than 20.1%, handily beating the S&P 500’s gain of only around 6% during the same period. Famous investor,s including Steven Cohen and Paul Tudor Jones, sold out their stakes in Papa John’s in the first quarter 2013. Is Papa John’s a good buy now, or is it too expensive after a five-year run?
Franchising business is the main profit contributor
Papa John’s is a pizza restaurant chain operating around 4,163 stores, including 696 company-owned restaurants and 3,467 franchised restaurants around the world. It has five main business segments: domestic company-owned restaurants, domestic commissaries, North America franchising, international, and all others. The two biggest revenue contributors were the domestic company-owned restaurants and domestic commissaries with $592.2 million and $545.9 million, respectively, in 2012 revenue. Because the franchise business enjoyed an operating margin of as much as 86%, however, the North America franchising segment turned out to be the largest profit contributor. It brought in more than $69.3 million in operating income.
What makes me like Papa John’s is its franchise business model. Franchise restaurants accounts for 80% of total Papa John’s restaurants in North America and 95% of the total restaurants in international markets. With the franchise model, Papa John’s enjoys higher margins and a higher return on invested capital with more flexible financing. In order to grow its franchise business, Papa John's provides a lot of support for new franchisees. It also charges no franchise fee and charges lower royalty fees than many of its peers.
The lowest valuation compared to its peers
Looking forward, Papa John’s looks to expand its business significantly overseas. It reported that there were around 1,100 units in the pipeline, most of which could open in the next six years. In 2012, Papa John’s expects to open around 120-135 net units. The area of growth has been chosen as Asia and Middle East. Consequently, Papa John’s estimated its international system sales would grow around 20%-25% with comparable store sales growth of 5% -7% for the full year. Earnings per share should come in at around $2.90 - $3.00.
Papa John’s trades at around $69.90 per share, with a total market cap of $1.52 billion. The market values Papa John’s at around 11.3 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Compared to its peers, such as Domino's Pizza (NYSE: DPZ) and Pizza Hut owner Yum! Brands (NYSE: YUM), Papa John’s is still the cheapest pizza chain.
Domino's Pizza – the strong franchise business growth
Domino's Pizza trades at around $63 per share, with the total market cap of $3.5 billion. The market values Domino's Pizza the most expensive, at 15.9 times its trailing earnings before interest, taxes, depreciation, and amortization (EBITDA.) Domino's Pizza ranks second in the global pizza business, with around 1.5 million pizza sold each day and deliveries of around 15 million miles per week. It has a much higher number of units than Papa John’s, with 10,255 company-owned and franchise stores.
In the U.S., Domino's Pizza has around 4,543 franchised stores and 398 company-owned stores. In the international market, the company solely relies on its franchise business. It has around 5,508 franchised stores but no company-owned stores in the international market. The company reported that it enjoyed its highest international store growth since year-end 2008, at 43%.
In the long run, Domino's Pizza expects to grow its global net units by around 4%-6%. The domestic same-store sales’ growth is estimated to be around 1%-3%, whereas the comp sales growth in the international market could be around 3%-6%.
Yum! Brands – Large exposure to Chinese market
Yum! Brands’ valuation stays in between. At $74.20 per share, it is worth around $33.1 billion on the market. The market values the company at 13.10 times its trailing EBITDA. Yum! Brands is the most diversified business among the three, as it owns three main concepts: KFC, Pizza Hut and Taco Bell. It seems to have the highest exposure in the large Chinese market, which accounted for as much as 48% of its total revenue.
Recently, the company was adversely affected by the poultry supply incident in China and the negative publicity related to the avian flu. As a result, the Chinese market experienced a significant drop of 20% in same-store sales in the second quarter. The company still feels bullish about its China operations, however. It estimated that the comparable store sales in China would recover by the end of the year.
Yum! Brands is still a good stock for long-term investors as it has significant exposure to China, the most attractive market for consumer goods businesses. This exposure could definitely benefit the company, delivering its shareholders sweet returns in the long run.
My Foolish take
Papa John’s seems to be relatively cheap at its current price when compared to Domino's and Yum! Brands. With growing operating performance and a focus on fast-rising emerging markets, the company's fundamentals are expected to improve. Despite a possible decline in the near term, Papa John’s could be a good long-term stock for investors.
Among the three companies featured here, I like Yum! Brands the most due to its significant exposure to huge growing Chinese consumers. When the same-store sales in China bounce back, Yum! Brands could experience a decent increase in its stock price.
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Anh HOANG has no position in any stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!