RESTAURANT COMPANY STOCK HIGHER THAN PRE-PANDEMIC – IS IT WORTH IT?
We published our analysis on October 22nd, showing almost all the publicly held restaurant companies, comparing their current valuations to those before the pandemic. That chart is provided below, with prices updated to midday on 11/9. Based on the 2/15/20 (pre-pandemic) estimate of 2020 earnings, and today’s estimate of 2021 earnings, it appears that Papa John’s (PZZA) while still carrying a very high multiple of earnings and EBITDA, is valued more reasonably today than ten months ago.
Let’s take a more complete fundamental look at Papa John’s. Back on February 15th, PZZA was selling at $66/share. Trailing EPS, for calendar 2019, had been $1.17/share. This previously troubled multi-thousand unit international franchisor was beginning to turn around. The table just below shows the turn to positive comps in the second half of calendar ’19, after the management change, the new product effort and the introduction of Shaquille O’Neal as a corporate spokesman.
As the following table, as provided by Bloomberg LP, shows: earnings per share had turned slightly positive in Q3’19, dramatically so in Q4, but still far below the earnings power from a few years ago. By February 15th, before the pandemic hit, expectations were no doubt for continued same store sales progress and more earnings recovery. Still, the system was far from healthy as several quarters of low single digit comps don’t begin to compensate for the high single digit negative comps that went on for eighteen months. It is worth noting, however, that international sales (about 30% of the 5300 unit system) were nowhere near as weak during the tough times, apparently not so much concerned with the drama surrounding John Schnatter’s departure. It is also worth pointing out that about 600 domestic units are company owned, providing operating leverage, right now on the upside, to corporate results.
In any event, back in February, before the pandemic came into view, the expectation was for continued positive comps and EPS in the area of $1.40, up from $1.17. PZZA, at $66/share was therefore trading for about 47x expected EPS, a fairly high P/E, but this is mostly the case when earnings are depressed and investors are anticipating a recovery.
Today, at $83, PZZA is trading at about 37x calendar 2021 consensus EPS. Adjusting for the the fact that calendar 2021 is farther out from today than 2020 was in February of ’20, the comparable multiple is about 39x expected EPS, about 18% less than back in February.
Just as we did in the case of Wingstop, the current question becomes: Is Papa John’s better or worse off today, as a result of the Company’s position in a post-pandemic world.
As the table above shows, the comps have been dramatic, both in North America and internationally. The EPS progress, after the first quarter, has been dramatic. Earnings have also showed dramatic improvement so far this year, with expectations of further progress next year. The Company has said that the third quarter was the last of the financial support provided to franchisees. Most importantly, free cash flow has been $134M in the first nine months of ’20, $67M in the third quarter alone. Cash and cash equivalents was $140M at 9/30, up from $28M at 12/31/19. Long term debt was unchanged in the last nine months, at $340M (including $20M current portion), relatively modest in this day and age from franchisors, considering that EBITDA this calendar year should be on the order of $150M. PZZA has a current dividend yield of just over 1% and has recently authorized the repurchase of $75M of common stock.
CONCLUSION:
The pandemic has been productive for Papa John’s, accelerating the improving trends that were already in place. New products have been successfully introduced, marketing has been increasingly effective, operational improvements have been implemented, John Schnatter’s departure and the following management transition are now firmly in the rear view window. The strong same store sales trends seem firmly in place and newly satisfied customers will likely (if the Company has their way) remain loyal. Earnings can still be considered depressed, especially with the upside leverage from 600 Company operated locations. The balance sheet could be leveraged further, to the benefit of shareholders. Among the (largely) franchised operators, the reward/risk ratio for PZZA seems better than most.
Roger Lipton
Note: The numbers in the table below were calculated as a “first look”, to be refined further as individual situations are reviewed. For example, the PZZA numbers below shows it undervalued by 34%, while the refined analysis above shows the s tock still undervalued but by a more modest 18%.
