Papa John's International Inc (O:PZZA)
When you think take out pizza, usually something like Domino`s Pizza Group Plc (N:DPZ) or Pizza Hut (N:YUM) comes to mind. However, it would be prudent for you to pay attention to that other take out pizza joint Papa John’s as it has some characteristics of a fantastic asset.
Over the past 10 years, Papa John’s has grown its revenue from $969 million to $1.6 billion by the end of 2015, for an average annual growth rate of 5.5%. Net profit has grown over this same period from $46 million to $72 million, an average annual growth rate of 4.6%. Operating cash flow has grown from $84 million to $158 million, representing a 6.5% average annual growth rate.
You witnessed shares outstanding shrink from 69 million to 40 million shares by the end of 2015, an astonishing 42% reduction. This has meant that earnings per share has grown at an annual average rate of 10.3%, outpacing the revenue, net profit, and operating cash flow growth over the past ten years. As an owner in the business, as Papa John’s bought out other owners and destroyed the stock, you would have seen your share of the profit pie rise.
What makes Papa John’s particularly fascinating is that the original founder, John Schnatter, still operates the company as CEO and owns a 26% stake in the company. Schnatter has been skilled in both operating the business and allocating the excess capital produced by the enterprise, which is a rare trait to possess for a corporate CEO, as CEOs tend to be good at either or, but not both.
On the operation side, Schnatter planned out the growth and expansion of Papa John’s in 3 stages. First, he built out the corporate restaurants that the company owns directly. Then, he started franchising out and collecting fixed payments from franchisees. And finally, Schnatter started to bring the development of the ingredients that go into making Papa John’s pizza’s in house, meaning that the corporate head office could collect profits from both franchising and selling the ingredients to franchisees. After this structure had been built, Schnatter began worldwide expansion. This structure has allowed the company to successfully expand to 4,000 stores spread over 36 countries.
Along with good operational skills, Schnatter has been great on the asset allocation side of the equation, as represented by the share buybacks over the past 10 years. Schnatter bought back stock aggressively when the stock was trading below its normal price/earnings ratio of around 23.4 from 2005 to 2013. He slowed down the pace of buybacks after 2013 when the stock has been perpetually valued way 23 to almost 40 times earnings. This type of activity demonstrates that Schnatter is not just blindly buying back shares for the sake of buying back shares: he is purchasing them back when they are quantitatively undervalued.
With Papa John’s, you are looking at potential ownership in a company that has been consistent with growing its revenue and profits over time. You get to ride along with the original founder and CEO, John Schnatter, who shows signs of being both a great business operator and capital allocator for shareholders. At the current stock price, it probably doesn’t make sense to initiate a position quite yet, as it is trading above its historic normal P/E ratio of 23.4. There will be opportunities to potentially get the shares at below 20 times earnings. It is around these prices of entry that outstanding results should follow from ownership in the company. For now, I would put Papa John’s on the watch list, study the company, and patiently wait for a more attractive entry point.
Disclosure: This author has no positions in any stocks mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.