For Immediate Release
Chicago, IL – August 19, 2020 –
Zacks Equity Research Shares of Papa John's International, Inc. ( PZZA Quick Quote PZZA - Free Report) as the Bull of the Day, Spirit AeroSystems Holdings, Inc. ( SPR Quick Quote SPR - Free Report) asthe Bear of the Day. In addition, Zacks Equity Research provides analysis on Spirit Airlines, Inc. ( SAVE Quick Quote SAVE - Free Report) , The Boeing Company ( BA Quick Quote BA - Free Report) , Northrop Grumman Corporation ( NOC Quick Quote NOC - Free Report) and Lockheed Martin Corporation ( LMT Quick Quote LMT - Free Report) .
Here is a synopsis of all six stocks:
Savvy investors know that the landscape can change rapidly. A company with the strongest financials can run into trouble based on circumstances that were totally out of the control of management. The flip side is that companies that appear to be in trouble can turn things around, sometimes dramatically.
Two years ago, it looked like
Papa Johns International was on the ropes. The company’s founder and CEO John Schnatter became embroiled in some embarrassing incidents during a period in which the national pizza chains were locked in a price war that saw the retail price of a take out pizza at (or occasionally below) cost.
Papa Johns franchisees were frustrated with the reputational damage to the brand at exactly the time they could least afford it. Schnatter’s comments about the NFL’s handling of player protests cost Papa Johns a lucrative sponsorship deal as well as his CEO position. The use of a racial slur during a company training session forced the board to strip him of his position as Chairman.
Over the course of the next year and a half, Schnatter - who founded Papa Johns by himself in 1984 in the back room of a Jeffersonville, KY bar - reduced his ownership stake in the company from 30% to less than 4% of outstanding shares.
Schnatter was temporarily replaced by franchisee and long-time company insider Steve Ritchie and subsequently by former Arby’s president Rob Lynch. Management immediately went to work shoring things up with the backbone of the business – the owners of the more than 2,400 franchise locations. The company extended discounts on supply contracts, loan forbearance and other generous terms to ensure that the franchisees were happy in their roles as the everyday face of the business.
They then turned to the task of replacing Schnatter in his role as the company’s main spokesperson and they pretty much hit the jackpot - landing ex-NBA star Shaquille O’Neil who is not only featured prominently in advertising, but also owns a multi-unit franchise operation and sits on the Board of Directors.
With his unassuming, everyman persona and famously large appetite, “Shaq” is the perfect endorser for the company's products. His signature pizza – the “Shaq-a-Roni” – features copious toppings and extra-large slices (of course), plus a donation to community-building and social justice charities.
The financial results speak for themselves. 2020 revenues are on pace to exceed 2019 by 11%. The net earnings figures are even better, with analysts expecting full year earnings to show a 20% increase and 2021 to be up more than 65% from there.
The most recent quarterly earnings report supports those lofty expectations. Sales of $461 million were a 15% year-over-year increase and earnings of $0.48/share beat the Zacks Consensus Estimate by 20%.
Though the revenue figure was a slight miss of analyst expectations, the split results actually tell an important story. Missing on the top line but still beating on the bottom is an indication of both strong margins and improving operational efficiency.
Papa Johns is also lucky enough to operate in a format that works well for the need of consumers during the Covid-19 related lockdowns. Restaurants that previously relied on on-site dining are suffering, but the take-out and delivery business is booming.
The fast-food and quick-serve restaurant industries tend to be plagued by price competition and loss-leader “special value” deals that rely on the premise that customers will also purchase other items like sides and sodas to add back profit to the check.
Establishing brand loyalty that keeps customers ordering full-priced menu items can often be the difference between surviving and thriving – and that’s exactly what Papa Johns is doing.
With rapidly rising earnings estimates and a Zacks Rank #1 (Strong Buy), it’s safe to say that this once-troubled operation has completely turned things around.
In today’s Bull of the Day, a company that looked like it was facing headwinds not too long ago has entirely turned things around and even received a boost from the significant changes in consumer behavior that have occurred because of the outbreak of Covid-19.
Unfortunately, there are also companies who are suffering – often through no fault of their own – because of current events.
Spirit AeroSystems is one of the less fortunate these days.
Though its sometimes confused with the discount airline with a similar name -
Spirit Airlines– Spirit AeroSystems has a much different role in the industry, as a manufacturer of aircraft components, they’ve been mostly insulated from the ups and downs of the business of carrying passengers, fuel prices and all the other vagaries that make the airline carriers a complicated investment.
Spirit manufactures the fuselage and wing components, primarily to
Boeing , but also to competitor Airbus as well as defense contractor Northrop Grumman, Bell Helicopter, Sikorsky – owned by Lockheed Martin – and several other manufacturers.
SPR began life as a public company as a spinoff of a Boeing division and though they are now completely separate entities, Boeing remains Spirit’s most important customer. Supplying an estimated 70% of the external structure of Boeing’s 737 aircraft, SPR generated more than 50% of revenues from Boeing prior to 2019.
Then trouble hit, and it was a 1-2 combination.
First, Boeing’s most popular and profitable product – the 737 MAX – was grounded around the globe after two fatal crashes that were believed to be the result of a malfunction of flight control systems that had nothing to do with the structural components supplied by Spirit.
Then, just when it appeared that reengineered versions of the MAX were ready to be certified for passenger trips by the FAA, Covid-19 hit and brought on significant restrictions on air travel, a massive reduction in business trips and a general sense of apprehension on the part of potential tourists.
During the second quarter of 2020, more than 16,000 planes were parked worldwide as flight bookings fell off by as much as 95%. Obviously, when major airlines are dealing with the logistical nightmare of storing so many aircraft because of lack of demand for ai travel, they’re not in any hurry to increase their orders for new planes.
Spirit AeroSystems has been rapidly instituting austerity measures in order to survive the cash crunch inflicted by the slowdown in aircraft manufacturing, but the effects of the slowdown have already taken a major toll.
2020 revenues are expected to be down by 58% and 2021 is nearly the same. The long term nature of investments in the industry can serve to smooth out fluctuations, but it also means that losses aren’t generally recovered quickly.
As the commercial aviation outlook becomes clearer, full-year earnings estimates for Spirit AeroSystems have taken a nosedive, falling from a loss of ($2.65)/share just 30 days ago to ($4.07)/share today. SPR is currently a Zacks Rank #5 (Strong Sell).
SPR shares are already off more than 80% from all-time highs, but there’s no indication that there’s any relief in sight. This company has an enormous amount of value for customers and investors alike during normal times, but when those sanguine conditions might return is anybody’s guess.
In the meantime, SPR probably represents too much risk for the average retail investor.
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