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Papa John’s Valuation Multiple Compared to Its Peers

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Valuation multiple

For this analysis, we considered the forward PE (price-to-earnings) multiple due to high visibility in Papa John’s (PZZA) earnings. The forward PE multiple is calculated by dividing the current stock price from the earnings estimate for the next four quarters.

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Papa John’s PE multiple

Despite posting better-than-expected 1Q17 earnings, Papa John’s forward PE multiple has fallen. As of June 20, 2017, Papa John’s was trading at a forward PE multiple of 24.8x—compared to 27.3x before the announcement of its 1Q17 earnings. For 2Q17, lower same-store sales growth estimates by Chris O’Cull of KeyBank led to a decline in Papa John’s stock price and its PE multiple.

On the same day, Papa John’s peers, Domino’s Pizza (DPZ) and Yum! Brands (YUM) were trading at 36.4x and 25.2x, respectively.

Growth prospects

As we discussed earlier, Papa John’s has been testing organic vegetable toppings and a gluten-free crust. The company also launched Papa Track, which allows customers to track their pizzas from order to delivery. If these initiatives don’t generate expected sales, increased expenses from implementing the initiatives could put pressure on Papa John’s earnings.

For the next four quarters, analysts expect Papa John’s EPS to increase 11.4%, which could have been factored into the company’s current stock price. If the company’s earnings are lower than analysts’ estimates, selling pressure could lower the company’s stock price and forward PE multiple.

You can mitigate these company-specific risks by investing in the iShares Russell 2000 Growth ETF (IWO), which has invested 48.7% of its holdings in restaurant and travel companies.

Next, we’ll look at analysts’ recommendations and their target price.

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