The Pizza Bowl: Who Wins?

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Super Bowl with its attendant noshing is the prime time play for pizza companies. Yum! Brands (NYSE: YUM), Domino's Pizza (NYSE: DPZ), and Papa Johns (NASDAQ: PZZA) are prepping for their busiest day of the year with some promotions that hope to differentiate themselves.

Pizza Hut is offering a free menu item to customers if the word "hut!" is used in the game. Sure bet there and it will introduce that free item as a new addition to the menu on February 5. Papa John's has been running a Facebook campaign to vote heads or tails on the game toss. Winners will get a free pizza. Another pretty sure bet. Domino's partnered up with Coca-Cola but this campaign which is only tangentially related to Domino's isn't a needle mover for Domino's. It seems that Domino's is sitting out this Super Bowl with specials throughout the month of January.

Pizza, I can take it or leave it. No favoritism here. Papa John's may be the one to go to Disney World, however, as it has also signed Peyton Manning as its newest franchisee of 4,000 worldwide. Manning is prominently featured on the coin toss promotion.

Janney analyst Mark Kalinowski believes all three are poised to take share from smaller pizza chains thanks to their online ordering initiatives, but noted Domino's may be the leader here with 3.6 million app users yet he still keeps a neutral rating on Domino's.

Pizza Won't Matter To Yum!

Yum! Brands which owns Pizza Hut, Taco Bell, and Kentucky Fried Chicken has seen its share price drop since a certain Chinese chicken supplier controversy (high levels of antibiotics and growth hormones in chickens from supplier Liuhe Group) led to the company lowering full year 2012 guidance for same store KFC sales in China. The stock was downgraded by Argus on January 17 from buy to hold. And the bad news keeps coming with no less than ten litigation boutique firms racing to file an investor class action suit against the company.

As these things usually play out the share price will droop until all the legal players stop advertising for new plaintiffs. Despite the fact that Yum! stopped buying from this supplier a possible crisis in confidence for China consumers caused Raymond James Financials analyst Bryan Elliott to downgrade Yum! to a sell shortly after the furor saying it could take months for Chinese customers to return especially after recent scares over food safety in the country.

As Yum! China is the largest division of Yum! Brands any success by Pizza Hut and Taco Bell with the Super Bowl will take a backseat to China. Motley Fool contributor Austin Smith thinks Pizza Hut could be an earnings driver going forward as pizza is, "a very resilient food class that resonates across geographies." Yum is currently trading at a lower P/E than these other pizza names at 18.89 and it has a 2.10% yield. Yum reports earnings on February 4.

The Big Showdown

While Yum! gets grilled on China, Domino's has been serving up a yearlong campaign to engage its customers and improve its quality. The campaign has been quite successful with the stock up 41.50% over the last year. As Domino's creates buzz with its "Oh Yes we did!" ads the mid cap company has a P/E of 26.03 and a beta of only .82. The operating margin is at 16.53. Domino's has over 10,000 stores in 70 global markets.

At twice the market cap of Papa John's, Domino's shouldn't yet be resting on their laurels. Domino's is already close to the median analyst price target of $48.00. Papa John's P/E is only 22.49, barely above the industry average of 22.33 and has a higher PEG of 1.80.

Papa John's, headquartered in Louisville KY, has 4029 outlets in 34 countries and is clearly gaining on Domino's. It's also up 42.05% over the last year and it has much less debt as a percentage to cash as well as a return on equity of 30.12%. And it has a larger insider hold of 24.93% to Domino's 14.59%. CEO John Schnatter, the actual "Papa John" holds 4,333,703 shares as of January 8.

Domino's is #1 worldwide in pizza delivery and only 387 of the 10,000 stores are company owned. It is a very attractive opportunity for franchisees as buying in starts at $150,000. Currently it holds 22% of US pizza delivery market share compared to 49% for all small independent and small chains.

According to their 2013 Investor Presentation global is where they're really growing with the five year CAGR at 13% for international sales. Domino's is also opening more international stores than its two big competitors with 1675 to Pizza Hut's 975 and Papa John's 491 over the last four years. Analysts see Domino's five year EPS growth slowing to 13.98% (yoy) down from the last five years' 26% rate. Papa John's EPS growth rate at 12% for the next five years not as sizzling as Domino's but an improvement from their 10% rate of the last five years.

Buy The Pizza Or The Stocks

Both companies report in late February, Domino's on the 28th and Papa John's on the 26th.  Unfortunately, color from the Yum! earnings call on the 4th won't really shed any light on these other pizza mavens. Sentiment on Yum! is at best, lukewarm, right now despite that it is probably a good long term hold for a portfolio. But of these three I think Papa John's is the one with something to prove and is on the move. I think they may just win this years Pizza Bowl. Go Ravens!


leglamp 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!

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