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This Pizza Restaurant Looks Tasty -- Should You Take a Bite of Its Stock?

Source Papa John's.

Papa John's Pizza (NASDAQ: PZZA  ) delivered strong results for the fourth quarter of 2013 on Tuesday, and the company is well positioned to continue outgrowing bigger competitors like Domino's Pizza (NYSE: DPZ  ) and Yum! Brands (NYSE: YUM  ) in the coming years. Should you take a bite of this tasty pizza company?

With double cheese and extra profits
When excluding the impact of an additional week in 2012, sales during the fourth quarter of 2013 increased by 12.2% to $387.9 million. The company opened 132 new restaurants in the quarter and 265 during the full year, of which 183 were international and 82 were in North America. This brings the total count to 4,428 restaurants, 3,286 of them in North America and the remaining 1,142 in international locations.

Comparable-sales growth remains quite strong, with an increase of 9% in systemwide North America sales and a rise of 7% in comparable-restaurant sales in international markets during the quarter. New restaurant openings are not hurting demand at existing locations, and this is a sign of strong demand and healthy growth prospects.

Earnings per share came in at $0.41 during the quarter; this represents a big increase of 32.3% versus the same quarter in the previous year when excluding the impact of the 53rd week in 2012.

A small fish in a big pond
Papa John's competes against bigger and more well-established global players like Domino's Pizza and Yum! Brands' Pizza Hut. This has some disadvantages in terms of scale and geographical reach, but it also means abundant room for growth.

Domino's Pizza is a giant in the pizza delivery business, with 10,886 stores as of the end of 2013, 5,900 of which are located in international markets. The company estimates that it serves more than 1 million customers per day, delivering more than 400 million pizzas per year on a worldwide scale.

International expansion has been a big growth driver for Domino's lately, and consumers seem to be responding positively to the company's strategy considering that comparable-store sales at international locations increased by 7% when excluding foreign currency impact in the last quarter. The domestic market delivered a more moderate increase of 3.4% in same-store sales during the period, but it still performed quite well for a mature business.

In addition to owning Taco Bell and KFC, Yum! Brands is the leading player in the pizza business on a global scale due to the ubiquitous presence of its Pizza Hut brand. The company owns 7,846 Pizza Hut locations in the U.S., 1,264 units in China, 367 units in India, and 5,490 stores in other international markets, for a huge total of 14,967 Pizza Hut stores around the planet as of December 2013.

Pizza Hut is delivering healthy performance in many international locations. However, the business is clearly losing market share in the U.S. as same-store sales there declined by 4% during the fourth quarter of 2013.

Small size, superior quality
What Papa John's lacks in quantity it more than compensates for in quality. The company's slogan, "Better Ingredients. Better Pizza" is quite clear in that respect. According to its website, Papa John's uses unbleached flour made from its proprietary formula; never-frozen, fresh-packed tomato sauce as opposed to remanufactured sauce made from tomato paste; and beef made with no artificial flavors, colors, preservatives, or bulking agents, among other things.

From its fresh, hand-tossed dough to its olives imported from Spain, Papa John's strategy is based on product differentiation and quality. Even if this means higher ingredient costs and operational expenses as tomatoes, onions, and green peppers need to be shipped multiple times per week to ensure they arrive at the stores as fresh as possible, consumers seem to be more than willing to pay a few extra dollars for a superior product with fresher ingredients.

Bottom line
Papa John's is delivering delicious financial performance for investors, and the company has plenty of room for growth as it continues to gain market share versus larger rivals like Domino's Pizza and Pizza Hut. Quality seems to be the name of the game in the pizza business lately, and Papa John's looks well positioned to continue generating mouthwatering growth.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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8/28/2015 4:00 PM
PZZA $68.28 Down -0.12 -0.18%
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YUM $81.82 Down -0.45 -0.55%
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