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Domino's vs. Papa John's: Which Stock is the Better Pick?

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While the restaurant industry struggles through its worst year since the end of the recession, pizza companies seem to remain unperturbed by the plight. Demand for pizza is hardly ever going to go down and pizza giants are riding on this certitude. Domino’s Pizza, Inc. (DPZ - Free Report) and Papa John’s International, Inc. (PZZA - Free Report) are two such companies that reign the quick service restaurant space.

Which of them makes for a better investment? Notably, both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance: In terms of stock price performance, both the companies proved to be somewhat level-headed.  While Domino’s outperformed the Zacks categorized Food & Restaurant industry year to date, with growth of 51.1% compared with 1.1% of the latter, Papa John’s delivered a slightly higher growth of 58.2%. Domino’s grew more in the first four months of the year, while the last few months have proven better for Papa John’s.

DOMINOS PIZZA Price and Consensus

Margins: While Gross Margin is nearly neck to neck for the trailing 12 months, Domino’s has better operating and net profit margins. We believe this could be a result of economies of scale, as Domino’s has a larger scale of operations. Thus, it is not entirely fair to judge the two companies on the basis of just margin performance.

Return on Equity: There is a stark difference between the return on equity (ROE) delivered by the two companies. While Papa John’s boasts a ROE of 4985%, Domino’s has eroded equity to the extent of 11%.

Estimate Revisions: Upward estimate revisions reflect optimism in a stock’s prospects going forward. Though both these companies’ estimates have moved north over the past month, Papa John’s has widely outpaced Domino’s in revision momentum. Analysts have bumped up current-year earnings estimates for Papa John’s by 2.5%, while Domino’s has seen estimates rise by 0.24%. Moreover, Papa John’s has a positive earnings surprise history in the trailing four quarters, with an average beat of 11.31%.

PAPA JOHNS INTL Price and Consensus

Valuation Metrics: One of the most important factors to consider is whether the stock is currently undervalued or overvalued by comparing its price to its earnings per share. Domino’s is currently trading at a trailing 12-month P/E ratio of 42.22 while Papa John’s has a lower P/E multiple of 35.49. Moreover, the forward P/E ratios for the stocks are 39.57 and 35.25, respectively. This proves that Papa John’s is presently undervalued and trading cheaper compared to Domino’s. Furthermore, Papa John’s P/S multiple also stands lower at 1.93 compared to 3.37 of Domino’s.

Bottom Line

By winning most of the battles, Papa John’s is likely winning the war in the pizza segment, as of now. Holding a beta of 0.25, the stock provides some relief from market volatility too.
Thus, if you are looking for a stock with a better growth story, Papa John’s is the one for your portfolio.

However, investors interested in this sector should keep an eye out for Domino’s as well, as it commands a huge market presence. Both of these companies’ strong digital ordering platforms, international expansion story and sales-boosting initiatives are likely to drive revenues and earnings, going forward.

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