Papa John’s or Domino’s: Which Pizza Stock Looks More Appetizing Currently?

support@smarteranalyst.com (Ben Mahaney)
·6 min read

Sales from restaurant and foodservice chains have been improving since the reopening of the economy following the easing of pandemic-induced lockdown restrictions. However, sales are still below the pre-pandemic levels as customers continue to fear dining out due to COVID-19. As per the National Restaurant Association, eating and drinking place sales in September were nearly $10 billion or 15% below the pre-COVID-19 sales observed in January and February.

Foodservice chains that quickly adapted to the evolving needs of consumers for digital orders and delivery were able to fare better amid the pandemic.

Against this backdrop, we will use the TipRanks Stock Comparison tool to place Papa John’s and Domino’s alongside each other to see which stock offers a more compelling investment opportunity.

This image has an empty alt attribute; its file name is PAPA-vs-Dominos.png
This image has an empty alt attribute; its file name is PAPA-vs-Dominos.png

Papa John’s International (PZZA)

Papa John’s International has recovered well from the negative sentiment triggered by its founder and former CEO John Schnatter, thanks to the strategic efforts of CEO Rob Lynch, who joined Papa John’s last year. A strong delivery business helped the pizza chain generate robust sales growth amid the global lockdown.

Pandemic-induced demand drove a 15.3% rise in the company’s 2Q revenue to $460.6 million with North American restaurants generating comparable sales (or comps) growth of 28% and international restaurants delivering comps growth of 5.3%. Strong top-line growth and operating leverage on robust North America sales boosted the 2Q adjusted EPS by 200% Y/Y to $0.48.

The company added over 3 million new customers through its digital channels in 2Q. In the 2Q conference call, the company stated that about 70% of its orders were placed on digital channels, with mobile ordering its fastest-growing platform.

Menu innovation continues to be a key priority for Papa John’s. Grilled Buffalo Chicken Papadia and Shaq-A-Roni pizza (launched in collaboration with NBA star Shaquille O'Neal, Papa John's Board member and franchise owner) are some notable launches in recent times. In the 2Q conference call, the company stated that the Shaq-a-Roni got a huge start, with over 2 million pieces sold since its launch in late June.

Meanwhile, the company sees a substantial potential to expand its footprint domestically and internationally. As of the end of 2Q, Papa John’s operated 5,347 restaurants, including 598 company-owned and 4,749 franchised, in 48 countries. The company’s network is smaller than rivals Domino’s and Pizza Hut.

Recently, Papa John's provided preliminary sales numbers for 3Q. Notably, comparable sales of North America and International restaurants increased 23.8% and 20.6%, respectively. The slowdown in North America comps reflects the impact of the reopening of dine-in locations of several restaurants and food chains.

On Oct. 2, Loop Capital analyst Lynne Collier initiated coverage of Papa John’s with a Buy rating and a $110 price target. The analyst feels that the company's unit growth is "poised to accelerate", noting that Papa John's is likely to be in the early stages of a multi-year growth story.

She added that with customer and franchisee sentiment improving since early 2019, when the company's management completed its turnaround, Papa John’s should now be able to translate those strides into a "lasting advantage" that should persist beyond the pandemic. (See PZZA stock analysis on TipRanks)

The Street echoes Papa John’s bullish stance with a Strong Buy consensus that breaks down into 9 Buys versus 3 Holds and no Sells. Shares have risen 22.8% so far in 2020 and the average analyst price target of $105.82 implies further upside potential of 36.4% over the coming months.

This image has an empty alt attribute; its file name is PAPA.png
This image has an empty alt attribute; its file name is PAPA.png

Domino’s Pizza (DPZ)

Domino’s is the largest pizza chain in the world based on sales with over 17,200 locations and more than 90 markets. It has delivered same-store sales growth for 38 consecutive quarters in the US and 107 consecutive quarters in the international business, reflecting the resilience of its business model.

The temporary shutdown of stores due to COVID-19 impacted Domino’s business, especially in key international markets. However, strong demand for delivery and takeout, especially in the US, has immensely benefited the company’s top-line in recent quarters.

Even prior to the pandemic, Domino’s had a very well established delivery network and digital presence in place. Unlike many of its rivals, Domino’s has its own strong delivery network and does not depend on third-party delivery companies.

Over the years, the company has made Pizza ordering very convenient for its customers by continuously adding various platforms to its AnyWare technology, including Google Home, Alexa, Slack, Facebook Messenger, Apple Watch, Twitter and Samsung smart TV.

In 2019, the company generated over 65% of its US sales from digital channels, including online ordering, mobile apps and several innovative ordering platforms, which reflects its aggressive approach toward digital growth.

Earlier this month, Domino’s reported mixed 3Q results as revenue came ahead of expectations but earnings lagged analysts’ forecast. The company’s 3Q EPS rose 21.5% Y/Y to $2.49 on higher revenue partially offset by increased COVID-related labor and supplies costs and higher food costs.

Meanwhile, 3Q revenue grew 17.9% Y/Y to about $147 million as the pandemic continued to drive demand for pizza delivery. Amid the pandemic, the company’s digital penetration increased to 75% of US sales in 3Q. Same-store sales rose 17.5% in the US market and 6.2% internationally.

The pizza chain continues to expand its presence and opened 236 net new stores in the first nine months of this year, including 83 in 3Q. Most of these stores were opened in the international markets, reflecting the company’s continued focus on growing its sales beyond the US. However, given the impact of the pandemic, it is currently reassessing its goal to open at least 25,000 stores by 2025. (See DPZ stock analysis on TipRanks)

Meanwhile DPZ continues to drive more traffic by adding new products to its menu. Recent innovations include new chicken wings with improved sauces, Cheeseburger pizza and Chicken Taco pizza

Following the results, Baird analyst David Tarantino reiterated a Buy rating for Domino’s with a price target of $450. The analyst stated that the factors suppressing profitability in the quarter do not appear structural and he is encouraged by the robust comps momentum that the company is delivering in both the US and international markets.

The Street’s cautiously optimistic Moderate Buy consensus for Domino’s is based on 11 Buys, 6 Holds and no Sells. Shares have risen 33.3% year-to-date and the average analyst price target of $441.86 indicates that an upside of about 13% lies ahead.

This image has an empty alt attribute; its file name is DPZ-1.png
This image has an empty alt attribute; its file name is DPZ-1.png

Bottom line

Currently, the Street is more bullish on Papa John’s compared to Domino’s as indicated by the consensus and higher upside potential in the stock. Moreover, Papa John’s is trading at a lower valuation multiple and its dividend yield of 1.16% is higher than Domino’s yield of 0.78%. With this in mind, Papa John’s appears to be a better pick than Domino’s right now.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment

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