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September 01, 2020 1:20pm
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Why These 2 Pizza Stocks May Be About to Rise

Pizza stocks to watch

Like many quick service restaurant (QSR) operators, pizza places have struggled in recent months. Cash-strapped consumers are spending less on pricier takeout food and delivery. Higher wage and commodity costs are eating into profits. From local mom-and-pops to national chains, pizza companies have largely delivered stale financial reports since benefitting from abnormal pandemic demand. 

But signs are starting to emerge that a rebound is underway. 

QSRs are rolling out new menu items and value deals to appeal to consumers’ budgets. The successful launch of $6.99 Melts are one of the reasons Pizza Hut grew sales 8% in the first quarter of this year. International expansion is another part of the growth recipe. This week, the Yum! Brands chain opened its 3,000th restaurant in China, showing that Western-style casual dining is taking hold in the world’s largest economy. 

Still, the industry’s biggest turnaround factor may be technology. Restaurants have begun to embrace artificial intelligence (AI) for ordering, food prep and easing hiring challenges. Panera and White Castle are experimenting with voice recognition ordering. Chipotle has teamed up with startup Miso Robotics on ‘autonomous sous-chefs.’ Efficiencies are being gained. Innovations like these also have the potential to improve customer engagement, especially among the tech-savvy younger generations. 

Meanwhile, food input costs are moderating. Cheese prices are down nearly 20% this year. 

Combined, these factors could lead to stronger financial performances for QSRs. In the quarters ahead, look for the two largest publicly traded pizza companies to have more dough on their bottom lines.

Did Domino’s Just ‘Drop’ Game-Changing Technology? 

This week, Domino’s Pizza, Inc. (NYSE: DPZ) launched Pinpoint Delivery which lets people get a delivery order from almost anywhere simply by dropping a map pin on the Domino’s app. It is the world’s largest pizza joint’s latest attempt to entice weary consumers with tech-driven convenience following successful rollouts of Domino’s Tracker and DXP delivery cars. 

Pinpoint Delivery could be a game-changer in the QSR space. No longer required to enter an address, people may be more inclined to order food from parks, beaches and other open settings. As the first QSR to introduce the option, Domino’s could be forever linked to the concept in consumers’ minds.

Pinpoint Delivery adoption aside; this is expected to be a recovery year for Domino’s as it addresses macro and competitive pressures. Restaurants of all types are turning to third-party services like Uber Eats and Door Dash to grab a slice of a delivery market long dominated by pizza. Domino’s is pushing back by doing what it does best — innovate to stay ahead of the curve. 

After a modest return to growth this year, Domino’s growth investments are expected to really stick in 2024. The consensus 2024 EPS estimate suggests that profit growth will accelerate next year. If management can demonstrate sales and margin progress to this end in the remaining quarters of 2023, the stock could run in anticipation of a strong 2024. 

Regaining the 50-day moving average line is a good first step. But at 22x forward earnings, the multiple expansion domino effect could be big for a stock that historically trades around 32x.

Will Papa Johns Stock Recover?

Papa John’s International, Inc. (NASDAQ: PZZA) will face one more period of difficult comps when it reports Q2 results on August 2nd. If things go as expected, the pizza delivery and carryout chain will have delivered five straight quarters of declining profits. From there, however, things should get much easier. With cost pressures expected to ease, Papa John’s is slated to deliver double-digit EPS growth in the subsequent three quarters.

Of course, these expectations are largely baked into the PZZA share price, so the company will need to turn some knobs that create outperformance. An increasing number of value items on the menu could be one of those knobs. Papa John’s has tackled flat sales by adding more every day and limited-time deals. An XL New York-style pie for $12.99 will be difficult for local pizza shops to compete with. Mash-ups with Doritos, like the $7.99 Cool Ranch Papadias are another valuable differentiator. If consumers gravitate to these kinds of deals, the revenue upside could be significant. 

Papa Johns claims to have better ingredients and better pizza…but will it have better profits? Not this year. Profits are forecast to be down around 6%. Next year though, analysts are forecasting a return to bottom-line growth. This could set the company up for a return to 2021 profit levels by 2025.    

This week, Loop Capital Markets kept its buy rating on Papa Johns and gave it a Street-high $114 price target. Due to the anticipated turnaround next year, analyst sentiment around the stock has been mostly bullish since the Q1 update. With Papa John’s shares down 12% year-to-date, market sentiment has been negative. Look for the 2024 recovery storyline to ‘top’ this pizza disagreement.

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