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Why Papa John’s Stock Has Downward Momentum

PART:
1 2 3 4 5
Part 3
Why Papa John’s Stock Has Downward Momentum PART 3 OF 5

Why Wall Street Lowered Earnings Estimates for Papa John’s

EPS estimates

After strong 2Q17 earnings, analysts forecasted that Papa John’s (PZZA) would post EPS or earnings per share of $3.10. However, with the entry of new players into the delivery service, analysts have lowered their estimate to $3.04. The new estimate represents growth of 13.4% from $2.68 in the corresponding four quarters of the previous year. For 2017, the company’s management set the EPS growth guidance in the range of 8%–12%.

Why Wall Street Lowered Earnings Estimates for Papa John&#8217;s

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EPS growth

EPS growth is expected to be driven by revenue growth, expansion of EBIT margins, and share repurchases. For the next four quarters, analysts expect Papa John’s to post EBIT margins of 9.3% compared to 8.9% in the corresponding four quarters of the previous year. The expansion is expected to be driven by sales leverage from positive SSSG (same-store sales growth), lower cost of sales, and a decline in D&A (depreciation and amortization) expenses.

During its 2Q17 earnings, the company’s management announced the approval of a new $500 million repurchase program. By the end of 2Q17, the company had $590.2 million under its share repurchase program. Share repurchases reduce the number of shares outstanding, boosting the company’s stock price. From the above graph, we can see that the company has outperformed analysts’ estimates in all five quarters. When this happens, a stock price tends to rise.

Peer comparisons

For the next four quarters, analysts expect Domino’s Pizza’s (DPZ) EPS to rise 22.3% while the EPS for Yum! Brands (YUM) is expected to fall 9.7%.

Next, we’ll look at Papa John’s valuation multiple.

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