PZZA - Papa John's

[ScottHall]

Is anyone following this as a long OR short? The numbers this quarter were atrocious and the operating leverage is destroying earnings power. One franchise nearby has been operating for five years and is now for sale for $90k. Also, for better or for worse, some people now have strong negative associations with the Papa John's brand.

 

As Rome burns, the management and largest shareholder are playing Game of Thrones with each other, and the company is reportedly trying to sell itself off. This is a business model that, when done well, generates goodly amounts of cash. The question is, can Papa John's comeback or will we see a wave of closures, with franchisees running away from reinvestment as they're watching their sales fall off a cliff?

 

Even if they can get the franchisees back on board and maintain control over their "keys to power," Domino's is expanding rapidly with comps in the high single digits and isn't so concerned with internal struggles. Pizza Hut wasn't able to find any magic in the most recent quarter either, but it's not hemorrhaging customers unlike Papa John and I'm sure would love to put together a few strong quarters on another player's misfortune.

 

The odd man out is Papa John, and a wounded company whose management seems more concerned with securing their own positions than with the company's overall health, makes for the easiest target in conquest.

 

Papa John's kingdom is being ravaged by internal mismanagement and that has opened the company up to external assault. Strategically, their position does not look good to me. But it's an asset with scale in what is usually a very profitable line of business, and that could be interesting for someone looking to make a big splash in pizza, quickly.

 

I have no position either way but it is a stock I am watching with great interest. If results do not stabilize, this stock could drop a lot more than it already has. This thread shouldn't be considered a buy recommendation, but it does exist to open discussion on what the best ways to take advantage of Papa John's missteps are.

 

Rather than dumpster dive at seemingly low multiples with a tainted brand, the best play may be to acquire shares of one of the likely beneficiaries of Papa John's market share erosion. Domino's has a seemingly high multiple but its execution has been consistently on point and has a strong capital allocation policy. For Pizza Hut, you get a variety of other franchises too in YUM that might be interesting but kind of dilute the opportunity.

 

To me, the American Carnage play is very real and I think delivery pizza is a big piece of that pie. It's an affordable luxury even the cash strapped consumer can enjoy, and takes advantage of an economy that has a strong bifurcation of results between people.

 

There are barbarians at the gate here, financially and competitively. Something interesting is going to happen in the delivery pizza market. I'm just not sure how I want to play it yet.

No position in any pizza stock yet but DPZ is probably the "favorite" to earn a spot in my portfolio right now.

 

https://ir.papajohns.com/news-releases/news-release-details/papa-johns-announces-second-quarter-2018-results-and-updates

[pcm983]

I think this has a decent chance of getting sold to PE - seems like the logical conclusion to the current stalemate - Papa owns 30% of the company so they can't just ignore him - he has economic and legal rights. Best option is probably for this to get fixed outside of the public eye. Need to rehab the brand / company over time.

[Guest Schwab711]

https://www.google.com/amp/s/amp.businessinsider.com/how-much-it-costs-to-open-a-papa-johns-2015-5

 

They have seriously cut new franchise fees and I'm not sure how profitable these restaurants were to franchisees before. I looked at PZZA about 6 months ago and the store economics were nothing to brag about.

 

I think PE makes sense as a buyer. At some price I'd be interested but it's hard to see how they grow earnings with this publicity overhang plus industry headwinds (pizza, operating expenses, and GRUB's making other locations more competitive)

[peridotcapital]

It looks like this latest PR nightmare is going to send them back to 2014 revenue levels. That year they earned ~$150M EBITDA and ~$$75M free cash flow. With 31.5M shares now, at $38 the equity value is $1.2B (EV $1.75B). So it is quite cheap for a near-90% franchised business.

 

Layer on Schnatter's ownership and it certainly seems like this company should be sold before next year's annual meeting. We know he was talking to Wendy's before the latest mistep, so he is open to a deal. He owns 30% so all he has to do is find a willing partner. He already lost the CEO and Chairman roles, would he really just do nothing and risk getting voted off the board next spring? Highly doubtful.

 

Either he gets a deal, with some stock included, and has upside there longer term. Or he disappears next year and the team can focus on turning around the business. Either way, investors at these prices can win nicely. Sure, the brand has issues, but look at DIN and what they have been able to do with Applebee's this year... franchised businesses are tough to kill because they generate cash even when SSS are falling hard.

 

FD: Long PZZA