The Best Pizza Company for Your Portfolio

Pizza has been a hot business lately. Which one is the best company for your portfolio?

Jan 28, 2014 at 7:51PM

Pizza has been a very lucrative business over the past few years, and investors have plenty of alternatives to choose from in the sector. Well-established players such as Domino's Pizza (NYSE:DPZ), Yum! Brands (NYSE:YUM), and Papa John's Pizza (NASDAQ:PZZA) are well positioned to continue delivering solid performance. In addition, high-growth companies such as Chipotle Mexican Grill (NYSE:CMG) and Buffalo Wild Wings (NASDAQ:BWLD) are entering the industry with innovative concepts.

Which one is the tastiest pizza company for your portfolio?

The established players
Yum! Brands is the owner of KFC, Taco Bell, and Pizza Hut, and this makes it a leading player in the global restaurant industry. Size and scale represent considerable advantages for Yum! Brands versus the competition, but this level of diversification can also have its drawbacks for investors.

The company has aggressively expanded into China in recent years, and problems with poultry suppliers as of late have produced a lot of negative publicity and a slowdown in sales in the country. Pizza Hut seems to be doing quite well in spite of these problems, as Yum! Brands announced a 7% increase in Pizza Hut sales in China during November, but It may take some time before the company can completely leave its problems behind.

With nearly 15,000 stores all over the world, Pizza Hut makes Yum! Brands the biggest player in the business. However, the company is about more than pizza, and recent controversies with poultry suppliers in China are a significant source of uncertainty for investors.

Domino's Pizza owns more than 10,500 stores in more than 70 countries, and the company is the industry leader in pizza delivery. Domino's makes more than half of its sales from international markets, and management claims that it serves more than a million customers per day, delivering more than 400 million pizzas per year on a worldwide scale.

Hot pepperoni pizza isn't the only thing Domino's can deliver, as financial performance has been remarkably strong since 2010, when the company changed its menu and revamped its operations. International expansion has also been a big growth driver for the company in recent years, as Domino's Pizza has expanded its international store count by a whopping 43% since 2008.

As of the end of the third quarter of 2013, Papa John's Pizza owned 3,251 stores in North America and 1,045 international stores. The company doesn't have the same scale or geographical reach as Yum! Brands or Domino's Pizza, but what it lacks in quantity it compensates for in quality.

Papa John's is focused on differentiating itself from the competition via product quality, using fresher ingredients to obtain a superior product. In addition, the company is firing on all cylinders in international markets. International revenues increased by 24.2% in the third quarter of 2013 on the back of an 8.1% increase in comparable sales on a constant currency basis.

The newcomers
Both Chipotle Mexican Grill and Buffalo Wild Wings are taking their first steps in the pizza business, with Pizzeria Locale and PizzaRev, respectively. It's far too early to tell whether these companies will find the same outstanding success with pizza that they've achieved in their main businesses, but they have certainly proved their ability to thrive and grow in the restaurant industry.

Chipotle has partnered with restaurateurs Bobby Stuckey and Lachlan Mackinnon-Patterson to launch Pizzeria Locale, a fast-causal pizza concept. The company intends to replicate its wildly successful business model by offering a simple menu of pizzas made from high-quality ingredients and allowing customers a high degree of flexibility when it comes to personalizing their selections.

Buffalo Wild Wings is following a similar approach with PizzaRev, which offers its customers the ability to craft "their own artisan pizza" using fresh, high-quality ingredients. Both companies are aiming to compete in the fast-casual segment, which has been a remarkably lucrative area in the restaurant industry lately.

Considering that Chipotle and Buffalo Wild Wings are among the most successful restaurant chains in the industry, investors have good reasons to closely monitor their competition in the fast-casual pizza business over the coming years.

Bottom line
Yum Brands! is an industry leader in pizza thanks to the global ubiquity of Pizza Hut, but the company exposes investors to considerable uncertainty regarding the future of KFC in China. Those looking for a solid performer with a well-established presence may want to consider Domino's Pizza instead. Papa John's is materially smaller, but international growth prospects look particularly delicious for this high-quality pizza company.

As for Chipotle and Buffalo Wild Wings, it's far to early to tell, but I wouldn't lose sight of these high-growth restaurants as they venture into the fast-casual pizza business.

Depending on investors' taste and risk tolerance, the pizza industry is certainly offering several appetizing alternatives to choose from the menu.

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Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings and Chipotle Mexican Grill and owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, and Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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