Papa John’s Stock offers tasty results and opportunities for expansion (NASDAQ: PZZA)

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Traditional restaurants have felt the disruptive impact of the pandemic. But, Papa John’s International, Inc. (NASDAQ: PZZA) remained unfazed. Now he sees more nuggets of hope as restrictions ease and his expansion continues. Its revenue growth, cash inflows and store the openings are in line with its expansion. But investors need to take a moment and find a better entry point before taking a position.

Business performance

Papa John’s International, Inc. is proving its resilience, given its continued rebound. Operating revenue was $543 million, up 6.1% year over year. North America and international branches have the most impressive revenue growth. Thanks to its constant and strong dynamic to innovate and expand its operations. Franchisees are also showing stronger performance with their increased investments in PZZA.

Operating revenue

Revenues (MarketWatch)

Likewise, there is an increase in costs and expenses. This part makes sense, given its continued expansion. For example, it has expanded into Kenya and Nigeria with its new franchise partner, Kitchen Express LTD. She plans to open at least fifty restaurants, which could earn the company more. It also entered into a franchise agreement with Sun Holdings. Inflationary pressures also increase the prices of raw materials and ingredients. This is accompanied by the suspension of its operations in Russia amid the geopolitical tumult. Thus, the operating margin fell to 26%. Even so, the fact that she has higher earnings amid store closures in Russia is a plus.

Operating margin

Operating margin (MarketWatch)

Papa John’s is well positioned as the increase in its restaurant openings is timely and strategic. Also, it has a scalable and ideal business model. Its business is divided into three major segments, namely catering, franchise and commissary. Its North American franchising supports branches in the United States and Canada. Meanwhile, international franchises are found in other countries outside of North America, such as the United Kingdom. Royalties, franchise fees and fees are collected from these franchises. But, curators make up the largest portion of revenue at 53%. Fortunately, all segments showed revenue growth this quarter.

You should also know that a large part of its restaurants is franchised. With this, costs and expenses are more manageable, which is more crucial amid inflation. Company-owned restaurants require more labor and capital than management franchises. Income seems more stable. What makes the business safe and robust is that it is the franchisees who secure the premises. Of course, franchisees know which part of the area is best to open a store. PZZA doesn’t have to see and survey the location on its own, which is more expensive and time-consuming. With more than fifty percent franchisees, it collects royalties and upfront fees. The initial costs of starting a business are borne by franchisees. This is why expansion is more lucrative and has moderate capital intensity.

If we compare it to other restaurants, Papa John’s is about average in terms of revenue growth. But of course, its closest peers are Domino’s Pizza (DPZ) and Yum! Trademarks (MIAM). The latter is the parent company of Pizza Hut. PZZA is one of the leading pizza chains in the United States. Its market share of 3.9% is unchanged compared to the comparative quarter. It just shows that it is keeping up with the competition and following the uptrend of the industry.

Market share

Market share (MarketWatch)

Why Papa John’s Can Speed ​​Up

Papa John’s is consistent with its expansion. Currently, there are 5,524 vs. 5,468 restaurants in 49 countries. With its strong development dynamic and its restaurant openings, the expansion continues. His impressive performance allows him to increase his prospects for opening restaurants to 1,400-1,800 by 2025. This will be a wise move, given the excellent business model he has to maximize.

How many restaurants does it have

How many restaurants he has (1Q financial report)

Also, it seems timely and relevant as the restaurant industry continues to thrive. Recent statistics show that each American spends an average of $1,200 on fast food every year. Overall, Americans spend $200 billion on fast food. The same study predicts that spending will increase by 2.2% each year. This is why the market size of the QSR industry can range from $900 million to $1 billion.

US Fast Food Spending

US spending on fast food (Budget Branders)

Fortunately, PZZA follows the market trend. But the most important thing is that he has the adequate capacity to do so. If you see operating cash flow, just cover the CapEx. The $15 million FCF can cover dividend payments. Only, operating cash inflows are lower than in 1Q 2021. But we can also see why they have decreased. First, the business continues to grow, which results in working capital. There are cash outflows from accounts receivable, inventory and other operating assets. CapEx is also 44% higher due to increased restaurant openings. In addition, it paid its operating debts, mainly accrued expenses and other current liabilities. These can often include liabilities related to utilities, labor, and other debts.

Operating Cash Flow and CapEx

Operating Cash Flow and CapEx (MarketWatch)

If we check it in the balance sheet, the cash and cash equivalents are less than half of the previous value. But, there is a substantial increase in inventory, receivables and PPE due to expansion. At the same time, borrowings and accrued liabilities and other liabilities decreased by 8% and 18%. Note that PZZA made a $400 million senior note offering in Q3 2021. From this, we can say that as the company grows, it also manages its financial leverage well.

Cash and cash equivalents and borrowings

Cash and cash equivalents and borrowings (MarketWatch)

Stock price valuation

Papa John’s International, Inc. stock price has been falling since the end of 2021. At $83.84, it has already been reduced by 37% from the starting price. Still, price metrics don’t show that the stock price is a bargain. There is a potential overvaluation as shown by the P/CF and EV/EBITDA ratios. Its peers also appear to be above fair valuation.

P/CF and EV/EBITDA ratio

P/CF and EV/EBITDA ratio (Yahoo Finance)

In the meantime, it may be an ideal dividend stock. It didn’t increase its dividends in 2018-20, but the payouts have been steady. Additionally, it has recorded an average dividend growth rate of 9.7% over the past few years. The largest was in 2021 at 35%. The dividend yield of 1.7% is lower than that of the S&P 400 of 2.14%. But it is higher than the NASDAQ component of 1.51%. Even better, this FCF is enough to cover borrowings. We can estimate the stock price using the DCF model and the dividend discount model.

  • DCF model
  • FCFF $124,000,000
  • Cash and cash equivalents $81,000,000
  • Borrowings $735,000,000
  • Growth rate to infinity 4.8%
  • WACC 9%
  • Common shares outstanding 35,675,000
  • Share price $83.84
  • Derived value $73.14
  • Dividend discount model
  • Share price $83.84
  • Average dividend growth rate 0.09725490196
  • Estimated dividend per share $1.40
  • Cost of capital Equity 0.1139533752
  • Derived value $74.99385098 or $74.99

Both patterns show that PZZA’s stock price is not yet cheap. There could be an 11-14% rise in the stock price in the next 12-24 points. Investors should therefore beware.

Conclusion

Papa John’s International, Inc. is a solid and well-positioned company. It has sufficient capacity to support and accelerate its expansion and dividend payments. Plus, it’s an ideal stock, given its upside potential and consistent dividend payouts. But investors should wait for a better entry point at $74-$76 before taking a position. The recommendation, for now, is that Papa John’s International, Inc. is on hold.

About Robert Moody

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