Papa Johns: Put A Slice In Your Portfolio

With further traction in the digital channels, we see continued strong comparable sales growth of high-single to low-double digits in North America and international markets, with strong gains for both franchised and company-owned restaurants. We forecast revenue growth of 4.2% in 2022 and project operating margins of 8.0% in 2021 and 8.2% in 2022, a significant expansion versus 5.3% in 2020.

Results should benefit from efficiency and productivity gains as well as expense leverage and some easing of labor cost pressures partly offset by higher delivery and commodity (cheese) costs, combined with technology/cloud investments.

After depreciation, amortization, and interest expenses, with a projected effective tax rate of 20%-23%, and some share buybacks, we forecast EPS of $3.13 in 2021 and $3.24 in 2022. Our 12-month target price of $140 reflects a P/E of 43x our 2022 estimate, a notable premium versus peers and the five-year historical average forward P/E of 32x.

We think PZZA’s premium valuation is warranted by further upside we see on the company’s strategic transformation. In May 2021, the company simplified its balance sheet upon retiring all the shares of its Series B convertible preferred stock.

Consequently, we believe the company has ample liquidity and financial flexibility to sustain its ongoing shareholder initiatives, including its dividend (with an implied recent yield of 1.1% after a 56% dividend hike in August) and share repurchases (under a $75 million program).

We note potential downside risks to our rating and target, including a global economic recession and/or decline in consumer spending, and potential reputational damage related to a lingering corporate governance fallout with the company’s founder and former controlling shareholder.

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