Papa John’s Falls Flat On Earnings, Shares Set To Rise

Key Points

• Papa John's share slipped in the wake of Q3 earnings but the bottom appears to be in. 
• The long-term fundamentals for a rally are in place and the stock is trading at a multi-year low. 
• Add in the dividend and the outlook for bottoming and reversal gets brighter. 

Wondering when the bottom may be in for shares of Papa John’s (NASDAQ: PZZA)? Want to buy some but aren’t sure when? Well, the Q3 results were no catalyst for higher share prices but they are helping to set the company up for a major rebound that could begin in 2023. While the Q3 results were tepid, there were impacted by near-term headwinds that are already beginning to dissipate. The company isn’t out of the woods, so to speak, but trading at pre-pandemic levels with revenue far above those same levels doesn’t make sense. Eventually, the market will get over what’s ailing it and this stock will resume its climb. Until then, the company will continue its efforts to build a global pizza empire and deliver capital returns to investors. 

Papa John’s Sinks On Weak Results 

Papa John’s had a good quarter until you bring the analysts and the market expectations into the picture. The company reported $511 million in net revenue which is down -0.3% versus last year’s record-setting quarter. The giveback isn’t awesome but we’re talking about record-level revenue in the face of uncertain economic conditions and a growing FX headwind. The bad news is that revenue missed the consensus estimate but by a slim 64 basis points which are as negligible, in the bigger picture, as the slight decline in YOY revenue which also includes the loss of Russian and Ukrainian business.

On a regional basis, North America performed the strongest and declined less than 1.0% compared to last year while the International market fell by 10% (about 4% on an FXN basis) and both are up strongly versus 2019. In the 3-year stack, revenue is up 30% in North America and 19% Internationally and the company is still growing. Store activity netted 18 new stores on a YOY basis with most of that in the International segment. 

The margin news is a little worse but still decent in regard to company operation, profitability, and capital returns. The adjusted operating margin contracted by 130 basis points which are slightly more than expected but still leaves the dividend in good shape. The quarterly payout ratio is running near 85% but this is the slowest quarter of the year. The full-year payout ratio will run closer to 42% which is sustainable and leaves room in the cash flow for increases and share repurchases. 

Better Pizza, Higher Yield, Papa John’s 

Papa John’s, like its competitors Domino’s Pizza (NYSE: DPZ) and Pizza Hut parent Yum! Brands (NYSE: YUM), pays a dividend but its yield is superior to the others. Trading at $73 the stock is yielding over 2.3% compared to about 2.0% for Yum! Brands and only 1.3% for pureplay Domino’s. The payout is relatively safe as well and backed up by a solid history and balance sheet. The company has only ever increased its payout and has made 6 total distribution increases in its lifetime. The last two were consecutive annual increases that suggest a third may come in fiscal 2023. At the recent pace of increase, it could be worth more than 10% to investors. 

The Technical Outlook: PZZA Is At The Bottom 

The price action in PZZA appears to be at the bottom of the current downtrend and sitting just above support at the $70 level. The bottoming is still early and may result in additional tests of this level but the indicators suggest the market is overextended at these levels and ready to rebound. The question is if the market can get above the 150-day EMA at it may have a hard time. The stock is highly valued at 24X its earnings and that alone could weigh on share prices in the near term. Longer-term, Papa John’s is a winner and share prices should recover smartly when the market gets interested in buying stocks again.