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Zacks Investment Ideas feature highlights: Papa John's

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For Immediate Release

Chicago, IL – October 10, 2018 – Today, Zacks Investment Ideas feature highlights Features: Papa John's (PZZA - Free Report) .

Could a Buyout Save Papa John’s (PZZA - Free Report) ?

It’s been a rough year for the nation’s third largest pizza chain restaurant Papa John's amid the abrupt ouster of founder and former Chairman and CEO John Schnatter. Schnatter relinquished his CEO role late in 2017 after making public remarks blaming the NFL National Anthem protests for lagging pizza sales and was then forced out as Chairman in July 2018 after it was reported that he had used racially offensive language during company-sponsored sensitivity training.

Schnatter has since gone on the offensive, suing the company he founded in an attempt to gain access to company materials related to his departure. He also seeks to remove current CEO Steve Ritchie, who he claims has mismanaged the company and created a “toxic atmosphere.”

Though he has been removed from company marketing materials and is no longer the public face of the company, Schnatter remains the single largest shareholder in Papa John's with a 30% stake and a seat on the board of directors.

Failed Negotiations

It was reported in July that during the fallout from the language scandal, Schnatter had been in talks with Wendy’s about a possible merger or buyout. Both companies declined official comment about those negotiations, but they seem to have broken down and Papa John's has remained an independent public company amid the public relations disaster and a subsequent decline in sales.

Papa John's shares declined by as much as 45% from their 52-week highs, closing as low as $38.94/share on August 8th. They’ve seen a rebound since then, however, and were up over 8% to $54.67 at mid-day on Wednesday amid speculation that the hedge fund Trian Fund Management might be considering its own bid for the beleaguered pizza chain.

Trian also owns 13% of Wendy’s and Trian founder Nelson Peltz is the Chairman of the Wendy’s board of directors. Though all parties – Papa John's, Schnatter and Trian – have declined to comment on any negotiations, it certainly makes sense that if Peltz was interested in a Papa John's – Wendy’s deal earlier in the year, he may well be considering taking a stake in Papa John's through a different deal.

What Would a Trian Deal Look Like?

With more than $10 billion in assets under management, Trian describes itself as a “highly engaged shareholder” that takes large stakes in a relatively small number of companies (7 - 10) with an expected time horizon of 3-5 years, and then makes use of its own vast management experience to influence value-building change.

Though the details of a potential deal remain scant at this point, it’s not too difficult to imagine how a firm like Trian might see value in a firm like Papa John's. Even with its currently shaky public image, Papa John's still has vast infrastructure in place with approximately 5,200 outlets and $1.78B in revenues in 2017.

Because of Schnatter’s outsized stake in the company, his cooperation would likely be crucial to any potential deal. The recent runup in shares would indicate that investors are expecting Trian – or possibly even another as-yet-unnamed suitor - to take a significant equity stake in Papa John's with the intention of gaining control and either rehabilitating the once strong brand, or merging it with another restaurant chain.

Should You Buy Papa John's Ahead of a Potential Deal?

Though shares of Papa John's have seen some positive momentum lately, it remains a fairly troubled company. Earnings estimates have been revised significantly lower in the wake of this summer’s controversies, resulting in a Zacks rank #5 (Strong Sell). The full year Zacks Consensus Earnings Estimate now stands at $1.51/share – 42% lower than the $2.62/share they earned in 2017.

Stocks with a potential deal on the horizon often seem like exciting opportunity for quick profits in a trade, its important to keep in mind that it’s essentially a binary bet on a single event. It might be profitable if a satisfactory agreement is reached and a new owner takes a big stake, but if the talks fall through, Papa John's would be no better off than before the rumors started - and could actually be in worse shape if the market concludes that the potential acquirer backed off because of substantive issues at the company.

Papa John's is an interesting story and we’ll have to wait and see whether any of the current participants are able to turn things around there, but there are too many solid companies that carry Zacks Ranks of #1 and #2 – and have no controversies – for Papa John's to be considered a good long-term investment.

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