Papa John’s: Launching Coverage With $72 Fair Value and Narrow Moat; Shares Trade Fairly

We’re initiating coverage of Papa John’s International PZZA with a narrow moat rating and $72 fair value estimate, leaving shares trading in a range we’d consider fairly valued. The firm is the third-largest limited service pizza player in its home U.S. market and fourth-largest globally, with 5,700 global units and a pipeline of nearly 3,000 more through franchise development agreements. With the company occupying the premium position in quick-service restaurant pizzas, it has proven it is better able to pass along inflationary pressures to consumers with lower elasticity, generating 10% annualized comparable store sales growth since 2019, against just 4% at wide-moat Domino’s and 1% at Pizza Hut (a wide-moat Yum Brands business), by our estimates.

Papa John’s narrow moat rating is derived exclusively from intangible assets, in our view, with its smaller sales base and higher mix of general and administrative spending as a proportion of global systemwide sales (4.5% over the past three years against 1.5%-2.5% of its largest QSR competitors) providing little indication of a durable cost advantage. That said, with 3.5% average annual comparable store sales growth since 2016 and high-teens restaurant margins at company-owned stores, the firm’s unit-level economics are quite competitive, with new builds featuring unleveraged cash-on-cash returns of 20%, placing the firm in the upper half of our disproportionately moaty restaurant coverage list. We view franchisee and bank interest in investing into a brand as the clearest demarcation of brand strength and forward prospects, and the firm also boasts an attractive international growth narrative in the U.K., China, and Chile markets (with a restaurant footprint now spanning nearly 50 countries).

We see a viable route to high-single-digit annual operating profit growth (9%) between 2023 and 2032, driven by unit growth (5%), comparable-store sales (3%), and a mix shift toward more profitable international markets.