Please ensure Javascript is enabled for purposes of website accessibility

Why Papa John's Stock Dropped 10% Today

By Rich Smith - Nov 27, 2018 at 5:33PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A notable asset management firm's interest in this pie has just gone flat.

What happened

Shares of pizza delivery chain Papa John's (PZZA 3.69%) suffered a steep sell-off Tuesday, closing the day down 10.2%. (And that's the good news. The bad news is that you just know some folks sold at the intra-day bottom, when the stock was down 15.7%.)

The reason: According to a Wall Street Journal  report, private equity firm Trian Fund Management LP, which had been considering a bid for Papa John's, "has decided not to pursue it."

Pizza

Who doesn't love pizza? Well, this private equity fund, for one. Image source: Getty Images.

So what

Papa John's has been trying to sell itself since at least October. (The Journal article says the process actually got under way back in August.) Problem is, explains the paper, aside from Trian, no one else really wanted to buy the chain entire, but only bits and pieces of it.

Thus, Trian's exit from the bidding process would appear to reduce the potential for a quick, clean sale that might allow Papa John's shareholders to recover some of their losses. At the very least, it means there will be one fewer potential buyers bidding up the price before whatever portions of Papa John's ultimately do get sold, get sold. This limits the upside on the stock.

Now what

With the stock down nearly 25% from its January highs, investors might be tempted to take advantage of Tuesday's sell-off to snap up some cheap shares. The problem with that, however, is that Papa John's shares don't really look particularly undervalued.

The stock still trades at nearly 40 times earnings, and with sales declining in the most recent quarter, analysts expect earnings to fall more than 40% overall this year, before climbing back by less than 3% in 2019. Over the next five years, the consensus estimate is that annualized profit growth at Papa John's will be just 4%.

Suffice it to say that 40 times earnings is an awful lot to pay for a company with such dismal growth prospects. If Trian doesn't want to buy Papa John's stock, maybe you shouldn't either.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Papa John's International, Inc. Stock Quote
Papa John's International, Inc.
PZZA
$86.60 (3.69%) $3.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.