Forget Domino’s, Buy These 3 Pizza Stocks Instead
We think shares of Domino’s Pizza (DPZ) look overvalued at their current price level, especially after the company reported a same-store sales decline for the last quarter. Therefore, we think...
We think shares of Domino’s Pizza (DPZ) look overvalued at their current price level, especially after the company reported a same-store sales decline for the last quarter. Therefore, we think it is better to bet on Yum! Brands (YUM), Papa John’s (PZZA), and Rave Restaurant Group (RAVE), which are well-positioned to capitalize on the industry tailwinds. Read on.
The largest pizza restaurant chain operator, Domino’s Pizza, Inc. (DPZ), which is headquartered in Ann Arbor, Mich., boasts roughly 18,300 stores across more than 90 markets. Its shares have gained 27.4% in price over the past nine months to close yesterday’s trading session at $480.27. However, the stock is currently trading 12.5% below its 52-week high of $548.72, which it hit on July 22, 2021. Also, the stock has lost 10.7% in price over the past three months.
DPZ’s revenue increased 3.1% year-over-year to $997.99 million for its fiscal third quarter, ended September 12, 2021, and its net income came in at $120.40 million, up 21.5% year-over-year. However, its same-store sales fell for the first time in more than a decade. The stock is also trading at an expensive valuation. In terms of forward EV/S, DPZ’s 4.99x is 248.2% higher than the 1.43x industry average. In addition, the stock’s 3.97x forward P/S is 226.9% higher than the 1.22x industry average. So, it could be wise to wait for a better entry point in the stock.
Nevertheless, the rapid rate of vaccinations and an increase in consumer discretionary spending should drive the demand for pizza restaurants. According to a Business Wire research report, the global pizza market is expected to reach $233 billion in 2023. Therefore, instead of betting on DPZ, we think it could be wise to bet on better-positioned pizza stocks Yum! Brands, Inc. (YUM), Papa John’s International, Inc. (PZZA), and Rave Restaurant Group, Inc. (RAVE). They are well-positioned to capitalize on the industry tailwinds.
YUM! Brands, Inc. (YUM)
Louisville, Ky.-based YUM, together with its subsidiaries, develops, operates, and franchises quick-service restaurants worldwide. It operates through four segments: the KFC Division; the Pizza Hut Division; the Taco Bell Division; and The Habit Burger Grill Division.
On September 7, 2021, YUM announced the acquisition of Dragontail Systems Limited, an innovative provider of technology solutions for the food industry. The company’s CEO, David Gibbs, said, “A key growth driver for our business and our teams is the continued acceleration of our digital and technological strategy, including how we leverage our global scale with investments in technology initiatives that enhance the customer and employee experience, strengthen restaurant unit economics and provide a competitive advantage for our franchisees.”
YUM’s revenues increased 34% year-over-year to $1.60 billion for the second quarter, ended June 30, 2021, while its same-store sales growth was 23%. The company’s net income and adjusted EPS increased 89% and 41%, respectively, year-over-year to $391 million and $1.16.
For its fiscal year 2021, analysts expect YUM’s EPS and revenue to be $4.53 and $6.57 billion, respectively, representing a25.1% and 16.2% year-over-year increase. In addition, it surpassed the Street’s EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 28.4% in price to close yesterday’s trading session at $125.79.
YUM’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
It has an A grade for Quality, and a B grade for Momentum. Within the A-rated Restaurants industry, it is ranked #18 of 44 stocks. To see additional POWR ratings of Growth, Value, Sentiment, and Stability for YUM, click here.
Papa John’s International, Inc. (PZZA)
PZZA operates and franchises pizza delivery and carry-out restaurants through four segments: Domestic Company-Owned Restaurants; North America Commissaries; North America Franchising; and International Operations. The company operates 5,400 Papa John's restaurants, including 588 company-owned and 4,812 franchised restaurants in 48 countries. PZZA is based in Louisville, Ky.
On September 29, 2021, PZZA signed a deal with Sun Holdings to open 100 new stores in Texas by 2029. The company’s CEO, Rob Lynch, said, "Our big global competitors have two to three times more restaurants than we do globally. So, we think that over the next five years, we are going to work to double the number of restaurants we have.”
PZZA’s revenues increased 11.8% year-over-year to $515 million in its second fiscal quarter, ended June 27, 2021. The company’s non-GAAP adjusted net income increased 107.1% year-over-year to $32.5 million, and its adjusted EPS rose 93.7% year-over-year to $0.93.
The company’s EPS and revenue are expected to increase 122.9% and 12.1%, respectively, year-over-year to $3.12 and $2.03 billion in its fiscal year 2021. In addition, it surpassed the Street’s EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 52.3% in price to close yesterday's session at $119.68.
PZZA’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our proprietary rating system. It has a B grade for Momentum, Sentiment, and Quality.
In the same industry, it is ranked #3. To see additional POWR Ratings for Stability, Growth, and Value for PZZA, click here.
Rave Restaurant Group, Inc. (RAVE)
RAVE operates in the rapidly growing fast-casual pizza space and franchises pizza buffet, delivery/carry-out, and express restaurants under the Pizza Inn trademark domestically and internationally. The Dallas, Tex.-based company operates through three segments: Pizza Inn Franchising; Pie Five Franchising; and Company-Owned Restaurants.
On August 25, 2021, RAVE announced an international development agreement with ZIS General Trading Company to open three new stores in Palestine. RAVE’s President and CEO, Brandon Solano, said, “RAVE is excited for Mr. Ziad and Mr. Ibrahim to help expand Pizza Inn's presence in Palestine. These new store openings will help Pizza Inn continue to expand its global footprint.”
For the quarter ended June 27, 2021, RAVE’s adjusted EBITDA increased 233.3% year-over-year to $2 million. The company’s net income came in at $1.50 million. versus a $4.20 million loss in the previous year. Also, its adjusted EPS came in at $0.09 compared to a $0.28 loss in the year-ago period. Over the past year, RAVE stock has gained 83.9% in price to close yesterday’s trading session at $1.24.
It’s no surprise that RAVE has an overall rating of B, which equates to Buy in our POWR Ratings system. It has an A grade for Quality, and a B grade for Value, Momentum, and Sentiment.
RAVE is ranked #5 in the Restaurants industry. Click here to see the additional POWR Ratings for RAVE (Growth and Stability).
YUM shares were trading at $124.76 per share on Thursday morning, down $1.03 (-0.82%). Year-to-date, YUM has gained 16.39%, versus a 23.59% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.