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Better Buy Now: Domino's or Papa John's?

By Adam Levy - May 20, 2016 at 3:40PM

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Both will make you a pizza, but which one will make you money?

With over 17,000 locations between the two of them, Domino's Pizza (DPZ -1.28%) and Papa John's International (PZZA 0.10%) serve millions of pizzas every year. After each reported their respective first-quarter earnings results, their stocks moved in opposite directions. Domino's missed expectations and investors punished the stock, while Papa John's reported better than expected results, sending the stock price higher.

Now that the cheese has melted, we can take a better look at each company and see which stock is worth investing in.

Domino's Pizza

Domino's stock fell 9% after reporting disappointing earnings results. Revenue was up across all four of Domino's reporting segments -- domestic stores, international stores, company-owned stores, and supply chain -- but grew just 7.4% overall to $539.2 million; analysts were expecting $543 million.

Importantly, Domino's earnings per share came in well below expectations at $0.89, versus expectations of $0.97. All of Domino's earnings-per-share growth came as a result of its share buybacks. Net income actually declined by almost 2% year over year, impacted by lower operating margin, which management blamed on higher wages.

Another factor driving down its net income is debt. During the first quarter, Domino's spent $25.9 million in interest, a 28.9% increase year over year. The company has $178.3 million in cash on its balance sheet that it could use to pay down its $2.21 billion debt more quickly and save on interest going forward. The company could also use that cash for another accelerated share repurchase program, or pay out a special dividend.

Domino's stock currently trades at a premium. Its forward P/E of 29.8 has it priced as if the next five years are going to see the same rapid growth as the last five years. For reference, the industry trades at a P/E around 24.5.

Papa John's

Papa John's reported better than expected earnings results, despite a year-over-year decline in revenue and poor same-store sales growth. The drop in revenue came from a decline in its lower-margin domestic commissary business, which management blamed on the decline in commodity prices and tougher comps due to the inclusion of Focus, its point-of-sale system, in last year's results.

Thanks to the lower expenses associated with that business and lower marketing expenses and sales bonus payouts, Papa John's grew its net income 18.4% year over year. Combine that net income growth with its share repurchase program, which bought back 1.286 million shares last quarter, and Papa John's increased its earnings per share by 25%.

Same-store sales growth was relatively sluggish. Overall comparable sales grew just 0.1% in North America and 5.7% internationally; that compares to 6.5% and 7.7% growth last year. Domino's posted 6.4% and 7.9% domestic and international same-store sales growth, respectively, last quarter.

Since the stock price increased, Papa John's now trades for 25 times forward earnings estimates. That's still around its average P/E ratio over the last five years, and well below where it was trading about a year ago. It's close to the industry average as well, and below Domino's 29.8 forward P/E.

Which one is worth buying?

Both pizza makers have shown excellent resilience in the face of intense competition from the quick-service restaurant industry. Domino's same-store sales growth is paralleled by only the best in the industry. However, Domino's lack of net income growth and significant leverage gives me pause. Domino's has a debt-to-assets ratio of 2.7 compared to Papa John's 0.65. Combine that with a high valuation, and it's a lot riskier than Papa John's.

Papa John's presents similar earnings growth prospects as Domino's, with analysts projecting an average five-year earnings-per-share growth rate of 18%. (They project 16% for Domino's.) Combined with a stronger balance sheet than Domino's and equally strong cash flow, Papa John's looks like a better buy right now.

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Stocks Mentioned

Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
$392.47 (-1.28%) $-5.11
Papa John's International, Inc. Stock Quote
Papa John's International, Inc.
$84.64 (0.10%) $0.08

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