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How Does Papa John’s Valuation Multiple Compare with Peers?

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Mar. 6 2018, Updated 7:31 a.m. ET

Valuation multiple

The valuation multiple helps investors compare companies with similar business models. Due to high visibility in Papa John’s (PZZA) earnings, we have opted for the forward PE (price-to-earnings) multiple. The forward PE multiple is calculated by dividing the company’s current stock price from analysts’ earnings estimate.

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Forward PE multiple

The initiatives taken by the company’s management to improve its SSSG (same-store sales growth) appear to have increased investors’ confidence, leading to a rise in Papa John’s stock price and its valuation multiple. As of March 1, 2018, Papa John’s was trading at a forward PE multiple of 22.8x compared to 19.1x before the announcement of 4Q17 earnings.

On the same day, Domino’s Pizza (DPZ) and Yum! Brands (YUM) were trading at a forward PE multiple of 27.1x and 23.7x, respectively. The higher margins, relatively higher SSSG, and faster expansion have allowed Domino’s and Yum! Brands to trade at a higher PE multiple than its peers.

Growth prospects

To drive its SSSG, Papa John’s is focusing on the improvement of its value perception, the implementation of technological advancements, its loyalty program, and other advertising avenues. The implementation of technological advancements could increase the company’s expenses. If the initiatives mentioned above fail to generate expected sales, the increased costs could put pressure on the company’s future earnings.

For the next four quarters, analysts are expecting the company’s EPS to fall 2.7%, which could have been incorporated into the company’s current stock price. If the company posts earnings lower than analysts’ expectations, the selling pressure can bring the stock price and valuation multiple of the company down.

Next, we’ll look at analysts’ recommendations for Papa John’s.

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