Although Papa John’s initial statement noting that it had to restate earnings sounded ominous, the restatement will not impact its previous state revenue or cash flow — only earnings.
| Net Income | Original | Revised |
| 2009 | $61.2 million | $57.5 million |
| 2010 | $55.4 million | $56.1 million |
| 2011 | $59.4 million | $58.5 million |
| 2012 (1Q-3Q) | $48.0 million | $47.6 million |
Source: Papa John’s announcement
Although these decreases in annual earnings, except for 2010, are disappointing for investors, it is encouraging that Papa John’s is honest enough to go back and fix the problems while offering investors full transparency to its process.
The company stated that it found a “material weakness” in its internal controls and is currently “implementing remedial measures” to avoid future mistakes, according to a regulatory filing.
Stackin’ up the pizzas…
Fundamentally, how does Papa John’s stack up to Domino’s Pizza and Pizza Hut parent Yum Brands?
| Forward P/E | 5-year PEG | Price to Sales | Debt to Equity | Return on Equity | Profit Margin | |
| Papa John’s | 14.71 | 1.57 | 1.02 | 22.96 | 30.12% | 4.73% |
| Domino’s Pizza | 20.45 | 1.66 | 1.59 | N/A | N/A | 6.44% |
| Yum Brands | 17.48 | 1.80 | 2.14 | 127.25 | 76.06% | 11.71% |
| Best Value | Papa John’s | Papa John’s | Papa John’s | Domino’s Pizza | Yum Brands | Yum Brands |
Source: Yahoo Finance
Despite its bullish performance over the past year, Papa John’s can still be classified as an undervalued growth stock. However, its margins are the weakest of the bunch, which means that lower commodity prices and increased pricing power could strengthen the company – which brings us back to a previous point: companies with stronger brand recognition, such as Pizza Hut and Domino’s, are usually able to raise prices and pass costs onto the consumer with fewer drawbacks than smaller competitors.
A comparison of top and bottom line growth also reveals a surprising trend.
PZZA Revenue TTM data by YCharts
Papa John’s profit growth has outpaced both Domino’s and Yum over the past five years, despite only growing revenue by 17%. Its top and bottom line growth is nearly synchronized with Domino’s Pizza, since they share a nearly identical business model — pure pizza. However, Yum owns other brands, such as KFC and Taco Bell, and is also weighed down by hormone-injected chicken woes in China.
The lesson here? People like pizza, and that human constant doesn’t look to change in the coming year. Looking forward, Papa John’s expects to grow its earnings by 10% to 14% in 2013. North American same-store sales are expected to rise by 1.5% to 2.5%, while international same-store sales are forecast to grow by 5.0% to 7.0%.
The Foolish Bottom Line
Despite its recent setbacks, Papa John’s is still a solid investment in the restaurant industry that rests slightly below the radar of most investors. Robust same-store sales growth and a strong demand for its simple business model could propel this stock to fresh highs next year. However, investors should be wary of increased competition in the pizza market, as well as food inflation, which is expected to crimp the margins of most restaurant operators in the coming year.
The article Is This Pizza Stock Rolling in Dough? originally appeared on Fool.com.
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