This week’s overvalued company of the week is Papa Johns International Inc. (PZZA). We will analyze this company using Warren Buffett’s approach for the Business and Management Review, and use Benjamin Graham’s methods for equity valuation.
Business and Management Review
1) Is the business simple and understandable?
Papa Johns is in the business of operating and franchising of carry out and delivery pizza restaurants. The main competition of Papa Johns is other “fast food” pizza operations including Pizza Hut and Dominos. The principle foundation of this business is simple to understand; they take orders, prepare the food, and deliver the product to the customer. It has typical franchise problems including store location, consistency of product, and hiring and training of staff.
2) Does the business have a consistent operating history?
Papa Johns sales, net income, and EPS have been turbulent over the past five years. Sales have been relatively stagnant which is negative for the company showing the lack of ability to increase business and grow the brand name. Net income significantly dropped off in 2003 and 2004 questioning the vulnerability of the company. Finally EPS, not surprising, followed the trend and flow of net income and fluctuated greatly over the past few years.
3) Does the business have favorable long term prospects?
Given the increased competition and the never ending pizza wars, which are reminiscent of the carbonated beverage battle, leads us to believe that Papa Johns does not have the brand recognition of their competitors. We also believe that Papa Johns needs to focus more on their franchised restaurants, after looking at their provided sales data comparing to the corporate stores. The franchised locations have consistently under performed the corporate owned locations, meaning something is going on within those franchised stores that are not favorable.
4) Is management rationale?
We find the current management team to be wrong for the shareholders. When the founder of the company (John Schnatter) is still sitting on the board of directors as chairman we feel there is a conflict of interest. We see no reason to not retain him as an advisor or even allow a seat on the board for him, but chairman is inappropriate.
5) Is management candid with its shareholders?
Investor relations are solid for Papa Johns, as they provide all the pertinent information for shareholders. We feel that the layout of the page is somewhat sloppy; however, it gets the points across that are needed.
6) Does management resist the institutional imperative?
Given the above mentioned explanation of the influence of management by the founder, we feel that there is a violation of the institutional imperative. We must question whether management has the opportunity to run the company, or if Mr. Schnatter is directly influencing all decisions.
Financial and Value Review
We find Papa Johns to be unsuitable for both the defensive and enterprising investor. For the defensive investor that lack of a low P/E and P/B eliminates it from their portfolio. For the enterprising investor the lack of paying a dividend and the fact that earnings are not greater than five years ago eliminates it for the enterprising investor. We find the P/E ratio to be over 35 and the P/B ratio to be above 8(see our methods).
We would not feel comfortable paying more than $21.00/share for Papa Johns.
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