What a brutal six months it’s been for Papa John's. The stock has dropped 28.7% and now trades at $22.77, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Papa John's, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Papa John's Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in Papa John's. Here are three reasons why there are better opportunities than PZZA, plus one stock we’d rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Papa John’s demand has been shrinking over the last two years as its same-store sales have averaged 2.5% annual declines.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Papa John’s revenue to drop by 5.7%. This projection doesn’t excite us and suggests its menu offerings will face demand headwinds.
3. Shrinking Operating Margin
Operating margin is a key profitability metric because it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.
Looking at the trend in its profitability, Papa John’s operating margin decreased by 2.6 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Papa John’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 4.3%.
Final Judgment
We see the value of companies helping consumers, but in the case of Papa John's, we’re out. After the recent drawdown, the stock trades at 20.2× forward P/E (or $22.77 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. Let us point you toward a dominant aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Papa John's
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