Which Pizza Stocks Deliver for Investors?

by Susan J. Aluise | March 1, 2013 12:22 pm

There’s a ferocious battle brewing among pizza chain stocks — and companies that can’t stand the heat might need to get out of the kitchen. Domino’s (NYSE:DPZ[1]), for example, recently reported a 22% jump in profits and shares bounced to an all-time high as a result.

Pizza is still the “go-to” food for folks who are too busy to cook. In 2012, sales at U.S. pizza restaurants surged to more than $36 billion last year, according to a report[2] from research firm Packaged Facts. A whopping 97% of adults eat pizza and 93% have bought from a pizza restaurant in the past 12 months — one key reason pizza chain sales are on the rise.

Still, consumers remain price sensitive and pizza chains also must be aware of two trends that are reshaping the market: a desire for healthier food and more exoticchoices.

With that in mind, let’s break down four publicly traded pizza stocks and see which one serves up the most flavor for investors:

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Domino’s: B

The Michigan-based chain’s aforementioned fourth-quarter earnings, which came to 64 cents per share thanks to $539.7 million in revenue, beat the Street on the top and bottom lines. Domestic same-store sales and sales outside the U.S. each gained around 5% as well, thanks in part to the new fresh-dough pan pizza launched in September. With the launch, Domino’s is going head-to-head with rival Pizza Hut — a unit of Yum Brands (NYSE:YUM[4]) — which long has been the big gun in the $6.4 billion market.

On top of that, the company operates nearly 10,000 restaurants in 70 countries and is expecting stronger international results — particularly outside Europe. Also notable is the fact that Domino’s initiated a 20-cent quarterly dividend on Thursday, which translates into a current yield of 1.7%.

I think Domino’s is doing a lot of the right things. Its pan-pizza strategy is an early success, as was its revamped menu and special promotions for oven-baked sandwiches, pasta, stuffed cheesy bread and chicken. Technology is another edge: One-third of all Domino’s U.S. orders are digital and the company’s sophisticated information technology infrastructure can support the international market as well.

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Pizza Hut: C+

#1 YUM! Brands (YUM)Parent company Yum Brands, which includes Pizza Hut, KFC and Taco Bell, has posted some solid numbers including same-store sales growth of around 5% and 11% growth in operating profit (excluding the 53rd week impact[5]) during most recent quarter.

Pizza Hut’s recent launch of Pizza Sliders — mini pizzas that come three to a box or nine to a box and sell for $5 and $10 respectively — has a lot of potential as well, while its some 10,000 restaurants in 90 countries and its international operations — particularly in China — have long been sterling contributors for the company.

Adverse publicity over problems with some of its chicken suppliers in January, though, led to a 15% drop in Pizza Hut same-store sales and a 41% fall for KFC. YUM China Chairman and CEO Sam Su apologized publicly and has revamped its supply chain and marketing[6].

All in all, YUM is a solid stock with the advantages of a $29 billion market cap, diversification and a decent current dividend yield of 2.1% … but the company is facing short-term headwinds now with the China poultry problems as well as new PR problems with horsemeat found in meat[7] at a UK Taco Bell. The food safety issues will pass, but will still weigh on earnings and same-store sales in the short term.

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Papa John’s: C

Papa John’s (NASDAQ:PZZA[8]) was founded by “Papa” John Schnatter 30 years ago, but has hit a bit of a rough patch lately. PZZA shares slumped on Tuesday after the company restated its earnings[9] due to an accounting error. Papa John’s also is facing a $250 million class-action lawsuit over alleged mobile phone ads and text messages.

Still, the company’s 5% growth in domestic same-store sales and 7% growth internationally is a solid foundation to build on, as is the company’s relationship with the NFL. Plus, Papa John’s has over 3,200 restaurants in the U.S. and nearly 1,000 restaurants in 35 other countries. Although the company characterizes customers as “cautious,” the chain expects to grow earnings by 10% to 14% in 2013. International markets will help drive that growth.

The bigger challenge for PZZA is convincing customers that its higher pizza price is delivering even greater value — possibly a tough sell given the discounts competitors are offering now. Of course, the stock is somewhat of a discount, too. It trades for 15 times forward earnings — lower than DPZ and YUM.

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Pizza Inn: D

Pizza Inn (NASDAQ:PZZI[10]) is the smallest publicly traded competitor in the space and the Texas-based company faces significant headwinds. The chain has about 310 restaurants under the Pizza Inn and Pie Five Pizza brands and a market cap of only $25 million. In its most recent quarter, it reported a one-cent a share loss, while total domestic franchise sales fell by nearly 9% in the quarter.

Thinly traded nanocaps are a dicey play at best, and PZZI faces tough competition and broader challenges in the near term. The company is working to incorporate more exotic fusion flavors into its menu; earlier this year its Pie Five restaurants launched a Cuban-inspired pan pizza with pulled pork and a special mustard sauce, for example. That could be a viable niche if successfully exploited, but the rest of its menu looks a lot like Domino’s.

To put it simply, I’m not sold on PZZI’s ability to deliver for investors right now.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

  1. DPZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPZ
  2. according to a report: http://www.packagedfacts.com/Pizza-Foodservice-Retail-6739179/
  3. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  4. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  5. excluding the 53rd week impact: http://www.businessinsider.com/yum-brands-q4-2012-earnings-2013-2
  6. revamped its supply chain and marketing: http://nrn.com/latest-headlines/yum-china-overhauls-supply-chain-marketing
  7. horsemeat found in meat: http://www.reuters.com/article/2013/03/01/horsemeat-idUSL6N0BTA7420130301?feedType=RSS&feedName=financialsSector&rpc=43
  8. PZZA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PZZA
  9. restated its earnings: http://news.yahoo.com/papa-johns-restates-earnings-back-000122754.html
  10. PZZI: http://studio-5.financialcontent.com/investplace/quote?Symbol=PZZI

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