At a time when restaurants across the country remain deserted due to social restrictions imposed by the authorities, leading fast-food operators are witnessing a rise in the demand for home delivery. And, the growing optimism among investors is visible in the performance of restaurant chains like Papa John’s International Inc. (NASDAQ: PZZA).
After the initial slump that followed the market selloff, shares of Papa John’s bounced back last month and maintained an upward trajectory since then. The general perception is that the trend will continue in the coming weeks, offering a buying opportunity to long-term investors.
Investing in PZZA
But, the market will be cautious on the stock, which looks overvalued despite the recent decline. Founder John Schnatter, who stepped down as chairman of Papa John’s two years ago, reduced his stake considerably in recent weeks, apparently in response to the mounting volatility in the market. It needs to be noted that at one point, Schnatter owned nearly a third of the company shares.
The management is bullish on achieving positive comparable sales this year, though international comps will be affected by the coronavirus crisis, especially in China where the company has good presence. However, it doesn’t see any significant epidemic-related impact on full-year earnings per share.
“Although March sales in North America were negatively impacted by the cancellation of large gatherings, including major sporting events, our international and domestic businesses have performed well, as customers and communities rely on us and others in the food delivery industry.”CEO Rob Lynch in a business update issued last week
It is true that the Papa John’s restaurants will remain under pressure from falling customer traffic in the near future. If the situation persists for too long, it won’t bode well for the company. Also, the nature of the business is such that it is susceptible to fluctuations in foreign exchange. Earlier, the management had withdrawn the guidance for fiscal 2020, citing the uncertainty. A recent survey showed that sales of US fast-food restaurants dropped by a third in the third week of March.
Interestingly, Papa John’s is expanding its restaurant team at a time most of the businesses are struggling to stay afloat. Others like Domino’s Pizza (NYSE: DPZ) and Pizza Hut are also on a hiring spree even as people are being rendered jobless elsewhere due to layoffs.
For the company, 2019 was a fruitful year, marked by strong financial performance. In the final three months of the fiscal year, adjusted earnings and revenues increased and exceeded estimates, reflecting continued uptick in same store performance. In the current quarter, drive-through service and home delivery have helped the company register sales growth so far.
At the same time, things don’t look very rosy for conventional restaurant operators. The majority of the ‘sit-down’ restaurants in the country have been hit hard by the shutdown, with footfall shrinking to almost nil. With the disruptions continuing, they are staring at a bleak future.
Papa John’s stock outperformed the market so far this year and closed the last trading session at $59.32, which is up 18% from last year. Having recovered from the recent selloff, the stock is probably on track to return to the pre-crisis levels.
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