Papa John’s: Overvalued As Margins Narrow Amid Revenue Slide

An image of John Schnatter, founder of Papa John's International Inc., is displayed on a pizza box in Shelbyville, Kentucky, U.S., on Friday, Aug. 3, 2018. Papa John's International Inc. is scheduled to release earnings on August 7. Photographer: Luke Sharrett/Bloomberg via Getty Images

Papa John’s International, Inc. (PZZA) is still reeling from the past PR blunders made by its founder. Domestic same-store sales have beenon the decline for more than a year. Operating margins have reached the lowest in more than a decade. More pressure on margins is likely in the years ahead as the company, in pursuit of lost market share in a highly competitive industry, steps up its expenditure on marketing and franchisee assistance. The above assumptions incorporated in a DCF model indicate an overvaluation of the stock, confirmed by relative valuation based on five-year median forward P/E.

Since the Starboard Value LP announced an ownership stake in Papa John’s in early 2019 with the appointment of its own CEO as the chairman of the board, the company seems to be shrugging off its troubled past. The stock is rising as investors hope for another restaurant turnaround by the activist investor. The second-quarter results of 2019 (2019 Q2) to be released soon will further clear up how successfully the hedge fund is going about its task at Papa John’s.

Haunted by its past

Papa John’s Pizza, the world’s third-largest pizza delivery company, is hoist with its own petard. Some of the remarks made by the founder John Schnatter, then-public face, and CEO of the company, was not to the diners’ liking.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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