Papa John’s Serves Up Guidance

Shares of Papa John’s International (PZZA) are surging more than 9% following Monday afternoon’s announcement that next year’s earnings per share will range from $1.70 to $1.90. Current analysts’ estimates had the company pegged to deliver $1.74 per share, so this news is seen as a positive to investors. Management said that they have considered potentially volatile cheese prices in the coming year, which will certainly have an effect on profitability. Furthermore, the projections assume domestic same store sales growth of between 1% and negative 1% for next fiscal year. Valuation is pretty attractive, as the stock closed at $21.65 on Monday and if Papa John’s is able to hit the midpoint of this guidance the forward looking P/E would be a very reasonable 12x.

In the company’s announcement, international growth was one of our major takeaways. Papa John’s is looking to grow its locations by 140 to 180 stores worldwide, with an emphasis on locales outside the United States. The reason for the push internationally was made abundantly clear as they are expecting 2010 international system-wide sales to grow by 15% to 20%. Domestic growth has been difficult to come by in the industry, as some of Papa John’s competitors have had shown declining same store sales in the past quarter. Domino’s Pizza (DPZ) saw comparable sales drop by about 1% in the latest quarter and Pizza Hut (YUM) was hit with a massive 8% decline recently. With the outlook for domestic sales flat, PZZA must look beyond the U.S. for growth.

At Ockham, we have an Undervalued stance on PZZA even after the stock’s nice run today. Papa John’s has been gaining market share domestically and clearly pushing for growth abroad. Meanwhile, the stock is still attractively priced compared to what the market has historically been willing to pay. For example, looking at the current price-to-cash earnings of 6.8x appears cheap compared to the historically normal range for PZZA is 8.5x to 14.5x. Similarly, price-to-sales has historically been between .62x and 1.03x, but the current metric is well below that level at .56x. Given the current fundamentals, we would expect Papa John’s to trade in the price range of $26 to $35, so today’s run-up does not greatly diminish the long term prospects for this stock.

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