Invest In America's Love Affair With Pizza

The recession took away America's appetite for eating out. Yet it seems like the one affordable luxury for many families watching their pennies is pizza. A favorite for both young and old, pizza parlors have tried to keep their prices under control so that a family of four can enjoy a meal for around 20 bucks.

Many restaurants suffered greatly during the economic downturn. But for the most part the bigger pizza chains pulled through - often by way of discounting through coupons and plenty of in-your-face advertising..

One of the larger U.S. chains, Pizza Hut, is owned by international conglomerate Yum! Brands ( YUM ) . But two of the bigger and best-known pizza purveyors are actually small-cap stocks: Domino's Pizza ( DPZ ) and Papa John's International (Nasdaq: PZZA) .

Let's put personal taste preferences aside and check out these stocks. Even though both remained profitable during the recession, one of them might turn out to be especially tasty for investors.

***Weighing heavily on the pizza profit picture are commodities, such as wheat for the flour, and dairy for the cheese. Both companies have profit margins around 5 percent. Interestingly, Papa John's keeps store costs under control by operating a cooperative to help the franchisees buy their cheese and other supplies at lower prices.

For decades, pizza meant locally owned neighborhood joints that, if successful, opened multiple outlets within a single market. That's not the case anymore. Along came Domino's, which has some 9,000 locations worldwide, and is three times the size of Papa John's.

"Papa John" Schnatter, founder and television face of his namesake chain, owns more than 20 percent of his company, which went public in 1993. Domino's was privately held for many years by the Monaghan family, and began selling stock in 2004.

Both stocks have shown healthy improvement this year with Domino's the top dog posting a 70 percent gain versus 16 percent for Papa John's. Both stocks have outperformed their industry. The Dow Jones restaurant stock index is up 24 percent year-to-date, about four times more than the S&P 500 and more than double the gains of the S&P Small-cap 600

***Watch any sports event, especially NASCAR and the NFL, and Papa John Schnatter's face is bound to pop up on commercials as he tools around in his classic Camaro delivering pizzas. The chain, which was a big sponsor during last February's Super Bowl, has other links to pro football - including a tie-in for the NBC Sunday night games and designation as the "official" pizza at some of the stadiums.

That visibility has impressed analysts. A Wall Street Journal blog noted recently that Brad Ludington of KeyBanc Capital Markets, who has a buy rating on Papa John's, thinks that football season might help give the stock a short-term boost. Indeed, since the NFL season started, Papa John's stock is up about 7.5 percent.

Of the six analysts surveyed by Thomson Reuters two rate Papa John's a strong buy, one has it a buy and three call it a hold. For Domino's, four of 13 say it's a strong buy, one has it a buy and the rest are at hold.

***The recession cut deep into the restaurant sector, and now there's a wave of consolidation going on. Burger King, CKE Restaurants (Carl's Jr. and Hardee's) and Landry's, to name a few, were taken private, and Arbys bought out struggling Wendy's.

One name that keeps popping up as a takeover target is Papa John's.

Following the Burger King buy-out, speculation surrounding "who is next" began to surface. Analyst Steve West of Stifel Nicolaus told Reuters that Papa John's was among the companies that he thought was on the acquisition short list.

A Forbes columnist noted that S&P's Valuation and Risk Strategies Team placed Papa John's among a half-dozen potential targets based on its 'discounted' stock and expectation for growing earings. The stock was trading at a discount to the 16.6-times earnings multiple of the consumer discretionary sector.

Papa John's is expected to grow earnings per share by 20 percent this year, to $1.81 per share, and 16 percent next year, to $2.09 per share.

Chances are that founder Schnatter isn't going to give up control of the chain that he founded in the back of his father's tavern in Jeffersonville, Ind., some 27 years ago. But whether the company is a buyout target or not the stock appears to have upside potential. And if the economic recovery surprises everyone and really catches fire, investors in Papa John's aren't likely to get burned.

Papa John's reports earnings on November 3 rd . For a primer on how to buy and sell stocks during earnings season I'm pleased to offer you a special video from Wyatt Investment Research's Jason Cimpl. As the Editor of Trademaster Daily Stock Alerts , Jason's always watching the market and directing his subscribers to buy and sell the right stocks at the right time. Check out his free video by clicking here.

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

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

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