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

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Papa John's International, Inc. (PZZA - Free Report) is struggling with a slowdown in its North American business and higher labor costs. This Zacks Rank #5 (Strong Sell) is expected to see falling earnings in 2018.

Papa John's is the third largest pizza delivery company in the world with over 5,000 stores.

Second Miss in a Row in the First Quarter

On May 8, Papa John's reported its first quarter results and missed on the Zacks Consensus. It reported $0.50 versus the consensus of $0.62. It was the second consecutive earnings miss.

Revenue fell 4.9% to $427.3 million due to lower comparable sales.

North American comparable sales fell 5.3% while International managed to finish in the green, up 0.3%. But North America is its bigger market by almost 2 to 1.

Operating margin at company-owned domestic restaurants also fell 2.7% as a percentage of related revenue, mostly due to lower comparable sales as well as increased labor costs including higher minimum wages and increased non-owned automobile costs.

Full Year Estimates Cut

And while the company reaffirmed its prior full year guidance, the analysts weren't really buying it as they slashed both 2018 and 2019 estimates.

3 estimates were cut in the last 2 months for 2018, pushing the Zacks Consensus Estimate down to $2.37 from $2.49.

That's an earnings decline of 9.5% compared to 2017 as it made $2.62 in the prior year.

Analysts see some rebound in earnings in 2019, with earnings growth expected to be 15%, but 3 estimates were still cut for 2019 over the last 2 months.

Shares Retreat

The shares have struggled in 2018, falling 8.5% year-to-date.

They're at 2-year lows.

Is this a buying opportunity?

Papa John's shares still aren't cheap. It trades with a forward P/E of 21.8.

For investors looking to invest in pizza, there are other opportunities with a better earnings outlook.

Domino's Pizza (DPZ - Free Report) is expected to grow earnings by 55% in 2018. Yum! Brands (YUM - Free Report) , which owns Pizza Hut, is forecast to grow earnings by 15.5% this year.

You can get international exposure by buying Yum China Holdings (YUMC - Free Report) which operates Pizza Hut in China. It's expected to grow earnings by 12.7% this year.

All three are Zacks Rank #3 (Hold) stocks.

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