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Bear of the Day: Papa John's (PZZA)

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Shifting consumer habits and a plethora of new delivery options have left the restaurant industry in flux, with traditional delivery powerhouses like some fast-food pizza chains struggling to compete. One such company is Papa John’s (PZZA - Free Report) .

Papa John’s operates & franchises pizza delivery and carry-out restaurants. The company is the world’s third-largest pizza delivery brand. Papa John’s has about 5,199 restaurants, including 743 company-owned and 4,456 franchised restaurants in 50 states, and 44 countries and territories.

After another lackluster earnings report, analysts have soured on PZZA. The company has witnessed a number of negative earnings estimate revisions, earning the stock a Zacks Rank #5 (Strong Sell). Additional headwinds should continue to cause volatility, making this restaurant pick one to stay away from for now.

Latest Earnings Report

In the most recent quarter, Papa John’s reported adjusted earnings of $0.65 per share, missing the Zacks Consensus Estimate of $0.68 and declining about 6% from the year-ago period. Domestic company-owned comps fell 4.7% during the quarter, while comps at North American franchise restaurants slumped 3.5%.

Papa John’s was plagued by higher costs related to marketing initiatives, unit expansion, digital ordering, and increased use of online and mobile web technology. In the fourth quarter, total costs and expenses amounted to $429.3 million, up 7.8% from the prior-year quarter. Meanwhile, operating margin decreased 390 basis points to reach 7.8%.

Earnings Estimate Revisions

 

As we can see, analyst sentiment for PZZA has worsened recently. We have seen four revisions for the company’s full-year EPS estimates, with 100% agreement to the downside, over the past 60 days. This is typically a bad sign for investors because share prices tend to respond to analyst estimates, and when that sentiment is slipping significantly, the stock is likely to sell off as well.

Other Key Metrics

Investors should also note that PZZA is sporting a “D” grade for Value in our Style Scores system. The stock is trading at nearly 24x forward 12-month earnings, so investors are not getting a great price for what is not a great earnings outlook. Meanwhile, the company’s PEG ratio of 1.84 is at a premium to the industry average.

Better Options

Luckily for investors looking for restaurant stocks, there are a few better options right now. One might check out BJ’s Restaurants (BJRI - Free Report) or Carrols (TAST - Free Report) , which both have Zacks Rank #2 (Buy) rankings, or DineEquity (DIN - Free Report) , which sports a Zacks Rank #1 (Strong Buy).

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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