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Investors Should Buy PZZA While It’s on Sale


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Papa John's (NASDAQ: PZZA ) stock may be one of the best bargains in the restaurant business right now. A sea of troubles, highlighted by the firing of founder John Schnatter and his lawsuit aimed at winning back control, means PZZA stock has a market cap of $1.7 billion, on 2017 revenue of nearly $1.8 billion.

Domino's Pizza (NASDAQ: DPZ ), by contrast, sports a market cap of $11.7 billion on 2017 revenue of about $2.8 billion.

Papa John's is a lot like Domino's was a decade ago. The pizza is said to taste like cardboard and it's being hammered for the politics of its founder (Domino's founder Tom Monaghan  built a conservative Catholic 'paradise' in Florida ).

If DPZ could turn around, PZZA should be able to. That's what private equity billionaire Nelson Peltz thinks, anyway. His Trian Management is reportedly considering a takeover of the company , perhaps putting it together with Wendy's (NASDAQ: WEN ) which Trian owns 13% of.

The Trend of Combining and Refranchising

Such a plan would follow the fast food industry's hottest trends, franchising and combining.

Disparate franchised food groups are being pulled together by companies like Restaurant Brands International (NYSE: QSR ), Roark Capital  - which is backing privately-held Inspire Brands , and JAB Holding which stands behind Keurig Dr Pepper (NYSE: KDP ).

Strong operators are following the lead of YUM! Brands (NYSE: YUM ), which has built $28.7 billion in market cap, on $5.8 billion of annual revenue, with Pizza Hut, KFC and Taco Bell.

The restaurant conglomerates are all on the hunt for brands that can be plugged-into their operational and marketing systems. Papa John's, which costs just $300,000 to open and is currently waiving its $25,000 franchise fee to new operators, looks like a steal.

Every fast food operator is following the franchise trend, even McDonald's (NYSE: MCD ), which has been selling off its company-owned restaurants to corporate owners . Franchisers have bigger margins than operators, while operators have more cash flow.

Don't Come to Papa

The Papa John's story is complicated, however, by the fact that Schnatter still owns 30% of the company, is still drawing headlines in court  and doesn't seem interested in walking away. In the meantime, the company he's feuding with has hired investment bankers to pursue a sale .

What most of the company's investors would prefer is that everyone focus on making pizza , preferably good pizza, at a profit, as Domino's did earlier this decade .

That would mean acknowledging past problems, instead of trying to ignore them under a new apostrophe-free logo  and running ads with franchisees  that do nothing more than remind people of PZZA's troubles.

When you're in a hole, the first thing to do is to stop digging. No one involved in this mess seems to have gotten this memo.

The Bottom Line for PZZA Stock

In a world where most restaurant franchises sell at a premium of two-to-five times revenue, Papa John's is selling at a discount to revenue, even with its recent rally. PZZA is for sale and it looks like a bargain.

Thus, big arbitrageurs are piling into the stock, with Legion Partners and the California State Teachers retirement system each buying 2.79% of the common .

Papa John's is in play, and if you like being a big-time arbitrageur but don't think you have the cash to play the game, now may be the time to get in. You might win cash, you might win stock, you might win valuable prizes.

The worst that can happen is you buy into a market segment that's becoming more attractive as interest rates rise amid fears of trade wars.

Dana Blankenhorn  is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family , available now at the Amazon Kindle store. Write him at  danablankenhorn@gmail.com  or follow him on Twitter at @danablankenhorn . As of this writing he owned no shares in companies mentioned in this article.

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The post Investors Should Buy PZZA While It's on Sale appeared first on InvestorPlace .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks
Referenced Symbols: PZZA , DPZ , WEN , QSR , KDP



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