Is Papa John’s (NASDAQ:PZZA) Pull Back An Opportunity To Buy?

Papa John’s Misses At The Top Line, But So What?

Papa John’s (NASDAQ:PZZA)  just delivered a report that confirms, once again, that there is a strong and vibrant rebound underway in the fast-food pizza arena. The difference between Papa John’s and most other fast-food restaurants is that its position as a 100% delivery/take-out restaurant positioned it to excel where others just thrived.

The top-line results missed consensus by about 150 basis points but to that I say, so what? The company produced a 15.3% increase in YOY revenue on business strength that is expected to carry through into the coming quarters. On a comp basis, comp-store sales across the company-owned North American footprint came in at 22.6% and beat the analyst’s target by more than one full percentage point. International comps were equally impressive if still hampered by closures. The international segment saw comps rise more than 5% or 13.3% adjusted for closures.

Despite the shortfall in revenue, Papa John’s produced GAAP and non-GAAP earnings of $0.48 to edge past consensus by a nickel. This is due to an increase in both the restaurant and operating margins associated with efficiencies of scale. Not only did the margins expand but they also beat consensus. The bottom line, the company is doing so much business not much is going to waste. To put how much business the company is doing into perspective consider this; Papa John’s had to hire 20,000 employees over the quarter to handle the demand. They’re planning to hire another 10,000 this quarter.

Papa John’s Guides Higher

Papa John’s didn’t exactly give us guidance for the coming quarter but it did provide an update that points to solid results. The comp-store sales in the third quarter are running 100 basis points above the average comp in Q2 putting the company on track to meet or exceed the 2Q results. Considering the fact that the first 6 months of the year have already produced 50% of the consensus for EPS and revenue in 2020, I have to say that once again the analyst’s estimates are too low.

Looking at the consensus figures, and assuming results in Q3 are even close to that of Q2, the company will only have to produce $0.20 in EPS for the 4th quarter. That’s about half the business that is expected and an easy target to beat. The average analyst is bullish on this stock but there are more neutral ratings than not. In this environment, it is safe to assume we’ll start seeing some upward revisions to Q3 and FY 2020 target if not outright upgrades for the stock.

Papa John’s Pays A Dividend But it Is Overvalued

On a valuation basis, Papa John’s is trading at a whopping 70X its 2020 earnings while its competitors are closer to half that mark if that high. The mitigating factor for Papa John’s is that consensus targets for earnings are much too low making the stock seem more over-valued than it is. The outlook for next year has EPS rising more than 70%, cutting the valuation down to a more reasonable 46X earnings, but even then it is trading at a significant premium

Regarding the dividend, with shares trading near $99 the stock is paying about 0.91% compared to an average 1.5% to 3.5% for most other fast-food names. The balance sheet has some debt on it but coverage is high so little to worry about other than valuation (and the meager yield).

Papa John’s Technical Outlook: Beware The Bears When Buying Papa Johns

The Papa John’s 2nd quarter report is good but perhaps not good enough, not now anyway, with shares trading at such a premium to its peers. I mean, Domino’s Pizza (NYSE:DPZ) is only trading at 30X next year’s earnings so it is offering a value where Papa John’s is not. And that may be why the short-interest is so high with PZZA, about 15% going into the release of the report, and why price action is down afterward.

I could be wrong and if I am price will move higher. A break to a new high would confirm the post-correction uptrend and possibly take the stock up another $10 to $20 in the near-term. The risk is that, aside from the shorts, the indicators are showing some real weakness in the market and more than enough reason for caution. MACD is showing a glaring divergence from the rally while stochastic is overbought, a condition that sets the stock up for a fall. If resistance is confirmed at the $99.50 region I see this stock moving lower, in the near-term at least.