I believe Papa John’s $PZZA ( ▲ 1.72% ) is being offered at least 20% below its true value.
Overview
Papa John’s was started by John Schnatter in 1984. The chain has 6,020 restaurants in over 50 countries. 58% of their locations are in North America and 92% of the restaurants are owned by franchisees.
Papa John’s revenue was $2.1 billion in their last fiscal year. Their revenue comes from:
Before platforms like Uber Eats $UBER ( ▲ 5.81% ) and DoorDash $DASH ( ▲ 11.63% ), pizza chains like Papa John’s and Domino’s Pizza $DPZ ( ▼ 1.67% ) had a stronghold on food delivery. In many places, if people wanted their food delivered, their choices were predominantly Chinese food or pizza. Uber Eats and DoorDash gave people more choices. Now I can have Chipotle $CMG ( ▲ 1.55% ), McDonald’s $MCD ( ▲ 0.46% ), and Jamaican food delivered to me, which negatively impacts pizza chains like Papa John’s.
Safety of Capital
Brand
Based on U.S. sales, Papa John’s is the 4th largest pizza chain in America behind Domino’s Pizza, Pizza Hut, and Little Caesars. I don’t see Papa John’s going out of business anytime soon. I think the brand can keep customers’ attention long enough to turn their business around. They currently have a marketing deal with Disney $DIS ( ▲ 1.65% ) and Pixar for Toy Story 5, which shows they are relevant enough to partner with a major film studio.
Strategy
Papa John’s leadership plans to improve the company by:
Cutting corporate overhead costs.
Investing more in local marketing to help franchisees generate more sales.
Improving their supply chain.
Closing underperforming stores and transferring customers to performing locations.
Management
Papa John’s hired the new CEO, Todd Penegor, in August 2024 to help turn the company around. He used to be the CEO of Wendy’s $WEN ( ▲ 1.77% ). At Wendy’s, he achieved 12 consecutive years of same-store sales growth and expanded the franchise to over 7,000 restaurants.
He was brought on to help Papa John’s innovate their products, expand overseas, and close unprofitable restaurants.
Board of Directors Experience
4 of the 8 board members have experience in the restaurant industry. This is a good sign. I often see boards where most members have little to no experience in the industry.
More information on Board of Directors: https://ir.papajohns.com/governance/board-of-directors
Debt Level
The company has $742 million of debt and $39 million in cash. I don’t like companies with debt. Debt reduces a company’s flexibility.
The good thing about Papa John’s debt level is their trailing 12 months operating income (~$86 million) covers their interest expense ($40 million) and their loans are not due until 2029-2030.
The company needs to increase their income soon though, because their interest expense might increase when the loans come due.
Valuation:
Based on my valuation model, Papa John’s is worth $41-47.
Income
Over the last 7 years, the company’s revenue grew on average ~3.1% each year. This is still not good because with restaurants, revenue can grow by opening new stores. The true performance of a restaurant is measured by their same-store sales growth. If they get back to growth, I see the stock skyrocketing.
Free Cash Flow
The company’s free cash flow has been volatile over the last 7 years. Based on management’s guidance, I estimate the free cash flow to be ~$50 – $75 million in 2026.
Dividend
In the last 2 fiscal years, Papa John’s free cash flow did not cover the dividend. I think they will decide to maintain or cut the dividend based on how the business looks in the next 12 months.
Spread
Based on the $32.75 price I paid for my shares, Papa John’s gives me a return of 5.62% on my investment. This is 2.62% higher than what my savings account pays.
Growth
The most realistic way for my investment to grow is if Papa John’s:
Stabilizes their same-store sales: 8 of their last 9 quarters had negative same-store sales. They need to close underperforming stores and transfer customers to the better performing ones. This will improve same-store sales.
Expands Overseas: International same-store sales were positive the last 6 quarters. They currently have a deal to open 2,000 restaurants across China and India by 2040. They need to open in strong locations and not cannibalize nearby store sales.
Private Equity Buyout: This is the second time Irth Capital is going after Papa John’s. The first time they partnered with Apollo at ~$64, but Apollo went alone and eventually backed out. Now it’s reported that Irth is trying to buy the company with Brookfield Asset Management $BAM ( ▲ 2.25% ) and Papa John’s largest franchisee, Nadeem Bajwa, who operates ~300 stores. If they buy the company for $47, that is a premium of 44% to the amount I paid.
Short Squeeze: Papa John’s has a high short interest of 17%. Any surprising, positive news can send the stock higher.
Evaluate
I believe this is a risky, but good investment. When Apollo tried buying the company, they offered $64. Irth Capital is reportedly offering $47. I’m below both their prices.
The two key risks are the company never stabilizes the business and they cut the dividend. Overall, I’m glad the leadership team is experienced in the restaurant industry, and they have an internationally recognized brand to work with.
–
Remember to pray for the Bronx and its success.
“Yes, the Lord will give what is good, and our land will yield its increase.”
Psalms 85:12 ESV
Sponsored by Making It Straight
Genesis 13: Family is inspired by Genesis 13 of the Bible. Visit Making It Straight to watch films and listen to music based on the Bible.
The Best Investment Book for Beginners
SIGE is a simple model that anyone can use to analyze their investments. The SIGE Model helps investors focus on the most important elements of any investment:
Safety of their money in the investment. Income from the investment. Growth of the investment. Evaluate the combined factors.
Learn how to avoid investments that are doomed to fail from the beginning.
