Papa John’s Int’l, Inc. (PZZA), Domino’s Pizza, Inc. (DPZ): Why You Shouldn’t Order Pizza for Your Portfolio

Shares of the two pure-play pizza companies, Papa John’s Int’l, Inc. (NASDAQ:PZZA) and Domino’s Pizza, Inc. (NYSE:DPZ) have both been hot of late, trading at all-time highs. However, because of their current valuations and long-term business prospects, I do not believe they have a place in your investment portfolio.

Valuation

As shown by the chart below, both pizza companies are trading at their highest respective valuations ever. In the past, neither company traded above a 20 forward PE, so I am skeptical that investors will continue buying these stocks at such high valuations. That being said, one cannot rule out an investment simply because it is fully valued. Warren Buffett has said,

it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price

PZZA Forward PE Ratio data by YCharts

Competition

Both Papa John’s Int’l, Inc. (NASDAQ:PZZA) and Domino’s Pizza, Inc. (NYSE:DPZ) have proved to be high-quality operators. However, as shown by the profit margin chart below, Papa John’s Int’l, Inc. (NASDAQ:PZZA) and Domino’s Pizza, Inc. (NYSE:DPZ) do business in a fiercely competitive market, where new competition is a constant. In my opinion, neither company has much of a competitive moat. I am not saying that their pizzas are bad or their delivery time is slow. Rather, there are many smaller companies that do the same thing. One reason for all the competition is that the barrier to entry is quite low in the industry.

PZZA Profit Margin Quarterly data by YCharts

Alternatives

If you want to make a long-term investment in a restaurant stock, my two favorites are Darden Restaurants, Inc. (NYSE:DRI) and McDonald’s Corporation (NYSE:MCD).

Unlike, Papa John’s Int’l, Inc. (NASDAQ:PZZA) and Domino’s Pizza, Inc. (NYSE:DPZ), Darden and McDonald’s are trading at forward P/E ratios in the mid-teens, not the mid-20s. Furthermore, both Darden Restaurants, Inc. (NYSE:DRI) and McDonalds pay healthy dividends: 3.08% for McDonald’s Corporation (NYSE:MCD) and 4.3% for Darden. Comparably, Domino’s pays a dividend of 1.3%, and Papa John’s Int’l, Inc. (NASDAQ:PZZA) does not pay a dividend.