Can You Make Some Dough With These Pizza Chains?

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Despite rising interest in healthy eating, Americans and their foreign counterparts continue to choose pizza when dining out.  Pizza-focused restaurants remain the second largest segment of the quick-serve restaurant (QSR) industry and grew sales 9% over the ten-year period that ended in 2011.  While thousands of mom-and-pop operators dot the landscape, the industry is dominated by Domino’s Pizza (NYSE: DPZ), Papa John’s (NASDAQ: PZZA), Yum Brands’ Pizza Hut (NYSE: YUM), and privately-held Little Caesars.  So, which players are worth your money?

Domino’s Pizza:  The king of delivery continues to grow its international market exposure, with over 5,000 stores located in 70 countries.  Since delivery sales have lost ground to dine-in and carry-out sales over the past few years, the company has been adding convenient locations and tech-savvy mobile applications that make the ordering and pick-up process easier for its customers.  In addition, Domino’s has been broadening its menu options, including oven-baked sandwiches and cheese-filled breadsticks.

In FY2012, the company generated rising system-wide sales, as well as a 6.2% increase in operating income.  Domino’s sales growth benefited from single-digit increases in both comparable store sales and the number of stores in operation around the world.  Meanwhile, lower commodity prices and efficiencies in store-level operations led to improvements in its gross and operating margins.

Domino’s stock price has been on a tear over the past five years, with a gain of roughly 245%.  Investors have re-valued the company higher as it has shown an ability to deal with the heavy debt load that was taken on in its previous leveraged buy-out.  With rising operating cash flow and a franchise-heavy business model, Domino’s has positioned itself well for the future.

Papa John’s:  The smallest of the chains has been winning over customers with its on-time guarantee and quirky ads.  In FY2012, Papa John’s continued to grow its business at a solid rate, with increases in revenues and operating income of 7.0% and 15.0%, respectively, versus the prior-year period.  The company benefited from single-digit increases in comparable store sales in both domestic and international markets, as well as an additional 7% of stores in operation.

Papa John’s stock price has also enjoyed strong price appreciation over the past five years, with a gain of around 115%.  The company also has the most promising growth trajectory, with international stores accounting for only 22% of its overall store base.  Given the success that Domino’s and Pizza Hut have had in diverse international markets, Papa John’s should be able to continue its sales growth as its expands beyond its current 34 international markets.

Yum Brands:  The Kentucky-based restaurant chain has the leading global position in the pizza category, in much the same way that it leads the quick-serve chicken and Mexican categories through its KFC and Taco Bell brands.  Similar to Domino’s, Pizza Hut predominantly employs the franchise model around the world, with only 6% of its stores owned by the company.  However, the company has taken menu diversification to a higher level, with its in-store Wingstreet unit that is taking advantage of the public’s unquenchable love for Buffalo wings.

In FY2012, Yum Brands produced strong financial results, with increases in revenues and operating income of 20.6% and 26.4%, respectively, compared to the prior year.  The company’s operating margin reached a five-year high, benefiting from rising comparable store sales and efficiencies from cost savings in its supply chain.  Unlike competitors, Yum Brands has outsourced all of its supply distribution needs to third party companies.

Of course, pizza is only part of Yum’s business, accounting for roughly 37% of its global restaurant base.  The company’s other restaurant concepts provide diversification against a shift in consumer preferences, but the business model also has potential risks.  In December, the Chinese government started investigating the food procurement practices of Yum’s KFC unit, when customers complained of sickness that they contracted after eating at various KFC locations.  Despite the short-term decline in its China sales growth, the region is a primary focus for Yum and provides the greatest source of potential growth for the company over the long run.

The bottom line

Pizza’s popularity continues to remain strong in the 21st century, with a stable, growing share of the overall restaurant industry.  While these three competitors are positioned for future sales gains, their strong stock price appreciation over the past few years have left each of them with P/E multiples north of 20.  Therefore, investors should put them on the watchlist and wait for a rainy down day in the market before adding them to their portfolio.


rghanley owns shares of Domino's Pizza. 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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