Last night the Papa John’s (NASDAQ:PZZA) earnings report confused many PZZA investors, which resulted in a knee-jerk reaction. PZZA stock is now up by nearly 4% in early morning trading.
It was a tough quarter as management missed on the top and the bottom lines. Comparable sales were down most notably 8% in North America but did better abroad. Luckily, these days, investors are only obsessed with forward guidance.
Despite the miss, Papa John’s management gave an upbeat forecast for full-year 2019. So it seems that after a tough 2018, they are confident going forward, especially overseas. This is usually the case with restaurants. When they have a tough year, they set up an opportunity for better comps over past weak performance.
Now the onus is on PZZA to show that they can indeed deliver on their promises. But for now, the immediate price reaction will be positive until we get more clues from future quarters.
There is some upside pressure perhaps from knowing that there is the activist effort from the Starboard Fund that levitates PZZA stock for now. It is good to know that there is outside pressure to do the right thing from people who have experience in the PZZA field.
Last year and coming into this quarter, Papa John’s stock had its fair share of problems. Most public was its issues stemming from the debacle that its founder’s racist comments caused. But the real bottom-line problems came from operations. The current CEO recognized that promotions ate up the profits. So this raises my question as to how they will solve this going forward.
If they stop promotions, then they risk delivering weak growth on the top line. And since everything starts with the sale numbers, it will be a tough slog ahead. Luckily they will have a low bar to cross from 2018 into this year but expectations are building.
This is to say that I don’t like the fundamentals of Papa John’s stock here. With all its problems, it still sells at a price to earnings ratio of 35. This is almost three times that of Apple (NASDAQ:AAPL) for an absolute comparison. Sure it is much cheaper than say Chipotle (NYSE:CMG), but that is a growth stock. A fairer comparison is to McDonald’s (NYSE:MCD) or Dominos (NYSE:DPZ) and PZZA is valued higher than those.
I am not dissing the company or its efforts, but it is not for me at this point. So it doesn’t mean that PZZA stock won’t do well. Long-term investors who disagree with me need not worry about my comments and can stay bullish the stock as long as their thesis remains viable.
But for the short-term, this won’t matter much since there are price levels to trade.
On the daily chart we can clearly see that PZZA stock has a bounce level at $38.20. This is evident from the corrections last August, December and more recently, February. This is good news unless the bears finally break below it.
If that happens, then the monthly PZZA chart would have a bearish head and shoulder pattern with ominous potential outcomes. I am not calling for it but it’s a technical scenario that I need to know exists.
Shorter term, the stock came into the earnings report with tightening range. A break from either sides between $41.43 or $42.33 per share would have some momentum in that direction. The first targets of those would be just over $1 from the lines. So this would be a relatively fast trade that profits from the momentum move.
But those levels also serve as guides to manage longer-term risk. So if I am long the stock, I know where the action lines are. So I don’t exit unless my lower trigger lines are crossed. Conversely, if I am long Papa John stock, I know where the buying will accelerate so not to exit too soon or where to add to my position.
So in summary, PZZA is not a stock for me except for a short-term trade. I will give management credit for their forward optimism, but I won’t give them my money. I will collapse next quarter hard if they indeed deliver on their promises last night.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.