Papa John's Pizza Is Positioned for Growth: Should You Buy a Slice?

Papa John's is clearly outgrowing competitors such as Yum! Brands' Pizza Hut and Domino's Pizza thanks to its quality differentiation. This tasty pizza company offers mouthwatering potential for growth.

May 29, 2014 at 9:47AM


Source: Papa John's.

Papa John's Pizza (NASDAQ:PZZA) is generating mouthwatering growth rates because of its quality differentiation in the pizza business, and the company still has a lot of room for expansion before reaching the penetration levels achieved by bigger players such as Domino's Pizza (NYSE:DPZ) or Yum! Brands' (NYSE:YUM) Pizza Hut. Should you buy a slice of this tasty pizza company?

"Better Ingredients. Better Pizza"
Papa John's slogan, "Better Ingredients. Better Pizza" is quite clear when it comes to the company's competitive strategy based on quality differentiation. Papa John's offers fresher and more natural ingredients than the competition; for example, the company uses unbleached flour made from its proprietary formula and fresh-packed tomato sauce as opposed to remanufactured sauce made from tomato paste.

Customers seem to clearly appreciate the better taste that comes with Papa John's special focus on quality. The company has achieved the highest score in the American Customer Satisfaction Index among national pizza chains in 12 of the last 14 years. Papa John's has a score of 82 in the 2013 ranking, versus 80 for Yum! Brands' Pizza Hut concept and 81 for Domino's Pizza.


Source: Papa John's.

The company is an industry leader when it comes to digital ordering and online technologies. Papa John's was the first national pizza company to offer systemwide online ordering at all of its U.S. delivery restaurants back in 2001, and it's still ahead of the pack in that area. Digital sales represented approximately 50% of all domestic systemwide sales and 60% of all delivery sales during the first quarter of 2014.

The company announced a 12% increase in revenues during the first quarter of 2014 to $401.4 million. Systemwide comparable sales increased 9.6% in North America and 6.4% in international markets during the period. In addition, Papa John's increased its number of units by 5.8% year over year.

Rising food costs -- especially cheese prices -- were a drag on profit margins, so net earnings per share rose at slower rate than revenues, increasing by 7.1% to $0.45 versus $0.42 per share in the same quarter of the prior year.

Cost pressures are a relevant risk to monitor; however, as long as demand remains healthy, the company should be able to overcome rising commodity costs via a combination of higher prices and hedging strategies to stabilize costs over the long term.

Delicious growth opportunities
Papa John's is growing much faster than bigger competitors such as Yum! Brand's Pizza Hut and Domino's Pizza, especially in the U.S.

Yum! Brands has built a huge global empire with Pizza Hut, however, it's not growing its revenue as fast as Papa John's. During the first quarter of 2014, the Pizza Hut division at Yum! Brands, which excludes China and India, generated a total increase in same-store sales of 3% in emerging markets and 1% in international developed markets. Same-store sales were materially weaker in the U.S. during the quarter, with a decline of 5% versus the same period in the prior year.

Domino's Pizza is doing better than Yum! Brands, but it's still not growing as fast as Papa John's. Domino's Pizza increased revenues 8.7% during the first quarter of 2014 to $453.9 million. Domestic same-store sales increased 4.9% during the period, while international same-store sales grew at a faster 7.4% pace.

Papa John's has 3,281 units in North America and 1,159 international restaurants as of the end of the first quarter. Management believes it has room for 4,000 restaurants in the U.S., and demand strength is confirming that the company still has considerable potential for growth at home.

Pzza International

Source: Papa John's.

When it comes to international growth opportunities, management is remarkably optimistic:

As in the case domestically, Papa John's is the quality leader in the international markets we serve. While our international markets will have their ups and downs as we gain scale, we are extremely bullish on our long-term prospects across the world. Today, we only have about one restaurant for 3 million people in our international market. So there's a long runway for growth for Papa John's internationally.

Foolish takeaway
Papa John's focus on quality and technological innovation are proving to be strong differentiating factors for the company, as Papa John's is materially outgrowing bigger competitors such as Yum! Brands' Pizza Hut and Domino's Pizza. Demand is notoriously strong in the U.S., and the company has abundant room for expansion in international markets. In addition to tasty pepperoni pizza, Papa John's is well positioned to continue delivering succulent growth for investors over the years to come.

Our best pick for 2014 is positioned  for explosive gains
Give me five minutes, and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year, his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252%, and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Andrés Cardenal 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information