Domino’s and Papa John’s: 2 Pizza Companies to Watch

Look towards your pizza delivery man for investment ideas.

Mar 14, 2014 at 3:53PM

Investing great Peter Lynch once said that "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them."  Pizza chains found in your local shopping center plaza such as Domino's (NYSE:DPZ) and Papa John's (NASDAQ:PZZA) can represent good places to start your research. Of course Lynch also advocated researching companies for things like good financials.  If the company you own doesn't produce cash flow, then it will veer toward bankruptcy and take your stock price toward zero.

Debt laden balance sheet
Domino's and its franchisees operate more than 10,800 stores. As with most chains of this size it's performing spectacularly on the international front. In 2013, same stores sales increased 6.2% internationally versus 5.4% domestically. International retail sales growth more than doubled the domestic rate when excluding currency translations during that time frame. Domino's increased its revenue, net income, and free cash flow 7%, 27%, and 5%, respectively. 
However, its balance sheet leaves much to be desired. Domino's debt exceeds liabilities, leaving a stockholder's deficit of $1.3 billion. This makes it impossible to put its $1.5 billion in long-term debt into perspective as its long-term debt to equity ratio is incalculable. Interest on long-term debt can kill the profitability of any company. Operating income currently only exceeds interest expense by four times. The rule of thumb for safety resides at five. Cash clocked in at a minuscule $14.3 million at the end of 2013. Domino's does pay a small dividend; last year Domino's paid out 22% of its free cash flow in dividends. As of this writing, it pays shareholders $1 per share per year, equating to a 1.3% dividend yield. 

Management owned
Warren Buffett, another investing great, likes companies run by owner-oriented managers. Managers who own a great deal of stock in the company they run will make sure it grows because they want to see their personal wealth expand.  In other words their interest is aligned with yours. With that said, Papa John's Founder, Chairman and CEO John Schnatter owns 27% of the company, meaning he possesses a vested interest in making sure that company shareholder value gets maximized.

Papa John's and its franchisees operated 4,428 stores as of the end of last year. Papa John's also performed well on the international front with comparable international sales up 7.5% versus 4% for domestic comparable sales. Overall, revenue and net income increased 7% and 13%, respectively, during 2013. Its free cash flow decreased 18% due mainly to increased capital expenditures. Its cash equated to approximately 10% of stockholder's equity at the end of 2013. Papa John's balance sheet shows a 79% increase in long-term debt for 2013 with long-term debt to equity coming in at 114% more than double the rate of 2012. However, operating income exceeds interest expense by 270 times. Papa John's paid out 21% of its free cash flow in dividends. Currently the company pays shareholders $0.50 per share per year and yields 1%. 

What to look for
Papa John's relatively stable fundamentals and smaller size gives the company more potential. Investors really need to eye Domino's interest expense. If it gets too large relative to operating profit then you need to shy away from it. Look for both companies to continue robust expansion on the international front as long as their balance sheets allow it due to lower market penetration in emerging and developing economies. Feel free to add these two companies to your Motley Fool Watch List.

Financial Advisors Hate This Man
Believe it or not, even some of the wealthiest individuals in America fall prey to these elaborate decades-old schemes. These 5 simple questions will reveal whether your financial advisor is using them as well... 

Can you answer "YES" to these 5 questions?

William Bias has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers