3 Stocks For Pizza Lovers

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

Note: This article has been amended to include Domino's recently initiated dividend.

Pizza is big business, and it’s easy to understand why. The economics of the pizza business are extremely favorable. Not surprisingly, there are some highly profitable stocks engaged in pizza that have served both their investors and customers well over the past several years.

For investors with a taste for pizza and a fondness for market-trouncing returns, here’s three stocks you should get to know.

Great pizza with extra profits

Two pizza stocks on fire in recent quarters are Domino’s Pizza (NYSE: DPZ) and Papa John’s International (NASDAQ: PZZA).

Papa John’s has seen financial results that are tough to beat. The company recently announced 6% same-store sales growth and 23% diluted earnings per share growth in the first quarter.

In addition, the company upped its 2013 earnings guidance, from a previous range of $2.85 per diluted share to $2.95 per diluted share, to its current expectation of $2.90 per diluted share to $3.00 per diluted share.

Papa John’s success has not been lost on investors. The stock has ballooned to a $1.5 billion valuation, after rising more than 80% just since the start of 2012.

As a testament to the powerful economics of the pizza business, Domino’s hasn’t lagged far behind. Domino’ is a bigger industry player than Papa John’s, holding a $3.5 billion market value after rising 85% since the beginning of 2012.

Domino’s underlying results have been equally impressive as Papa John’s. Recently, Domino’s reported first-quarter profit that was up 25% from the previous year’s adjusted EPS. This growth was due largely to strong domestic same-store sales growth of more than 6% year over year.

Domino’s is executing particularly strongly in the emerging markets, where the biggest growth opportunity presents itself for pizza stocks. The company’s international division outperformed, posting 6.5% same-store sales growth in the quarter, amounting to the 77th consecutive quarter of international same-store sales growth.

Don’t forget the industry juggernaut

Of course, the behemoth of the pizza business continues to be Pizza Hut, which is owned and operated by Yum! Brands (NYSE: YUM). Yum! holds the Pizza Hut chain in addition to Taco Bell and KFC, and has actually underperformed its smaller rivals.

Yum! shares have stagnated over the past year on continued worries pertaining to the safety of its KFC product offerings. Very recently, Yum! reported a 16% drop in second-quarter EPS, due largely to the aforementioned problems.

Yum! is heavily focused on China, its most important market, and the drop in sales and profits in the region is the main reason for the uninspiring quarterly results. Same-store sales actually rose 1% in the United States, but fell a massive 20% in China.

Despite the problems at KFC, Pizza Hut is actually a pillar of strength for Yum!, which the company desperately needs right now. June same-store sales fell another 10% in the company’s China division, again led by KFC, which posted a 13% decline in the month. At the same time, Pizza Hut sales in China actually rose 6%.

Is there still room to run?

Domino’s and Papa John’s have seen great operating results in recent quarters. While that would usually be the catalyst for a ‘buy’ recommendation, it needs to be said that these results are largely priced in to the valuation profiles of each stock.

Both stocks trade in excess of 25 times trailing earnings, and Papa John's doesn't pay a dividend. After such impressive run-ups over the past couple years, risk-averse investors may have a hard time justifying paying such high multiples. I can certainly emphasize with that assessment: at such high valuations with no dividends, there’s little in the way of downside protection. One bad quarter, and these stocks could easily plummet.

Yum!, meanwhile, does pay a dividend of around 1.8% and Domino's pays 1.26%. Those are decent payouts, but it trails the yield available on the S&P 500. At the same time, Yum!'s results aren’t nearly as impressive as its two peers.

As a result, investors need to tread carefully among the field of pizza purveyors. Domino’s and Papa John’s are clearly the best-performing pizza stocks, but at current levels, you’re paying a steep price for that performance. I’d recommend investors at least wait for a 10% pullback in Domino's or Papa John's before jumping in.

Profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it’s gone.

Robert Ciura 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!

blog comments powered by Disqus