What a brutal six months it’s been for Papa John's. The stock has dropped 25.6% and now trades at $34.41, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Papa John's, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Papa John's Will Underperform?
Even with the cheaper entry price, we're cautious about Papa John's. Here are three reasons we avoid PZZA and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales at restaurants open for at least a year. This is a key performance indicator because it measures organic growth.
Papa John’s demand has been shrinking over the last two years as its same-store sales have averaged 1.9% 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 6.1%, a decrease from This projection doesn't excite us and implies its menu offerings will see some demand headwinds.
3. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, Papa John’s operating margin decreased by 3.3 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. Following the recent decline, the stock trades at 22.5× forward P/E (or $34.41 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.
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