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Papa John’s (PZZA): Long-Term Outlook Bright, Risks Remain


On Oct 13, we issued an updated research report on the world’s third largest pizza delivery company, Papa John’s International, Inc. PZZA.

Papa John’s reported upbeat second-quarter 2016 results on Aug 2, wherein both earnings and revenues beat the Zacks Consensus Estimate. The company raised its guidance for 2016 as well.

Notably, the company has been posting positive comps both in the domestic as well as international markets over the past several quarters. Going forward, the company is expected to maintain comps growth on the back of its focus on menu innovation and value offers.

Meanwhile, large scale international expansion has been the backbone of Papa John’s operations of late. Currently, the company has more than 1500 international restaurants, with over 350 restaurants across 16 Latin American countries. The company intends to launch its 5000th restaurant globally by the end of 2016.

Papa John’s efforts to remove artificial flavors and synthetic colors from the entire menu are commendable and should appeal to health conscious customers. Further, the company’s heavy investments in technology-driven initiatives like digital ordering and development of applications continue to boost revenues.

Moreover, on Aug 19, Papa John’s paid a quarterly cash dividend of 20 cents per share, a 14% increase over the previous payout of 17.5 cents, to stockholders of record as on Aug 8. We believe that the dividend hike reflects the company’s strong cash position and solid balance sheet, and should bolster investor confidence and thereby improve its market position.

However, negative currency translation is a concern for Papa John’s as it has considerable international presence. Thus, fluctuating currency exchange rates, which has been hurting in 2015 and the first half of 2016, will continue to impact international revenues in the near term.

Further, higher labor costs and a soft consumer spending environment in the U.S. restaurant space raise concerns.

Zacks Rank & Stocks to Consider

Papa John’s currently has a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include The Cheesecake Factory Incorporated CAKE, Darden Restaurants, Inc. DRI and Wingstop Inc. WING. All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cheesecake Factory’s earnings have surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 8.49%. Further, for full-year 2016, EPS is expected to grow 15.5%.

The Zacks Consensus Estimate for Darden’s 2016 earnings climbed 1.6% over the last 60 days. The company’s earnings have surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 9.32%.

Wingstop has posted positive earnings surprise in all of the last four quarters, with an average beat of 15.46%. Further, for full-year 2016, EPS is expected to grow 17.6%.

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