Should I Buy PZZA Stock? 3 Pros, 3 Cons

by Lawrence Meyers | November 6, 2013 1:05 pm

Papa John’s International (PZZA[1]) reported third-quarter earnings this morning that grew 18% year-over-year. And while Papa John’s stock hasn’t moved much today, shares of PZZA are sitting around all-time highs.

papajohns Should I Buy PZZA Stock? 3 Pros, 3 ConsSpecifically, Papa John’s earnings were 65 cents per share — in line with analyst estimates for PZZA. Also, the Papa John’s earnings report showed that same-store sales were up 1.8% for North America and exploded 8.1% internationally.

Is strong international growth a great sign for Papa John’s stock, or is it too risky to take a bite of PZZA stock at these levels? To see, let’s take a look at the pros and cons of owning PZZA.

PZZA Pros 

Strong same-store sales. The most promising sign from the Papa John’s earnings report was strong comps from PZZA, which drove strong revenue growth. Sale grew around 8% for the first nine months of the year, thanks in part to increased awareness via marketing and increased traffic. This is particularly true on the international side, where PZZA revenue increased 21% for the first nine months. Comps internationally were even stronger, with an 8% improvement during the same period. That kind of growth is crucial for PZZA stock continues its run.

Strong franchise base. PZZA has 654 domestic company-owned stores and 2,588 franchise stores in North America.  Franchises are great for Papa John’s earnings, because PZZA just sits back and collects its royalties while dictating terms to keep the brand intact. The business model is a solid foundation for Papa John’s stock investors.

International is exploding. The international segment was strong in recent Papa John’s earnings, and should continue leading the way in years to come thanks to aggressive international expansion. Pizza travels well; it’s popular all over the world. Clearly, PZZA management sees great potential overseas as a result. PZZA has a development pipeline of 1,300 stores, and 1,050 of those are going to opened internationally. That in turn should also drive PZZA stock higher.

PZZA Cons 

Stock buybacks mask weak earnings growth. One thing to notice in the Papa John’s earnings report is that the share count for PZZA stock has decreased substantially. PZZA stock had 22.1 million and 22.4 million shares outstanding for the three and nine months ending this past quarter — a 6.9% and 7.2% decrease over the prior year periods. That means Papa John’s earnings from operations only increased 11% when you include buybacks of PZZA stock — not as impressive as the headline number.

Free cash flow declining. One of the most important measures of a company’s ongoing success is its generation of free cash flow. That’s bad new for Papa John’s stock investors. Operating cash flow at PZZA dropped almost 20% to $74.8 million in the quarter. The Papa John’s earnings report also showed that capital expenditures increased almost 50%, creating a net 47% decline in free cash flow for PZZA.

Needless stock split. Last but not least, PZZA management announced a 2-for-1 stock split. To be frank, there’s no reason to split PZZA stock, other than to distract from the weak Papa John’s earnings growth.

Verdict

International expansion is a promising trend for PZZA, but it might not be enough to make Papa John’s stock a buy at this time. After its sizzling year-to-date run, PZZA stock is trading for a frothy 25 estimated 2013 Papa John’s earnings and 22 times estimated 2014 earnings.

That hardly justifies long-term growth of 15% for Papa John’s earnings. With that in mind, I would wait to see how the international expansion unfolds and see its effect on Papa John’s earnings and PZZA stock before buying any shares.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.

Endnotes:
  1. PZZA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PZZA

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