Both Domino's Pizza, Inc. (NYSE: DPZ) and Papa John's International, Inc. (NASDAQ: PZZA) have been surprising winners in the post-recession era as their shares have skyrocketed. The competing pizza chains have expanded into international markets, finding ripe new territory to operate in and expand through new franchised restaurants that have helped boost earnings.
As the chart below shows, both stocks have performed well over the last 10 years, but Domino's has been an especially big winner.
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However, the landscape for both companies is starting to change as they now have thousands of restaurants abroad and concerns about a "restaurant recession" at home have begun to crop up. Let's take a look at what each stock has to offer to determine which is the better buy today.
A remarkable turnaround
When Domino's shares were in the dumps following the recession, the company did something that most restaurants would never dare to: It admitted its food was bad. In a national TV ad campaign, CEO Patrick Doyle repeated customer complaints like Domino's crust tasted like cardboard, and then committed to making the pizza better. Domino's improved its product, and invested in tech to make ordering easy and available through a number of platforms like Twitter, and even added a pizza tracker so customers could see at what stage of the process their order was.
The result was an undeniable success as sales and profits surged at home and international expansion delivered growth from abroad. The pizza delivery chain has also benefited from the "stay-at-home" economy as Americans have gotten accustomed to video streaming and ordering things online, which complements food delivery well.
In its most recent quarter, Domino's posted strong comparable sales growth at home at 9.5, and saw that figure rise 2.6% abroad.
Earnings per share jumped 34% to $1.32, but the stock sold off as international growth was weaker than expected. Still, U.S comparable sales growth near 10% is excellent at a time like this, and the company otherwise seems to be executing on its goals.
Turn the heat up
Like Domino's, Papa John's surged following the recession, but the stock has slumped over the last year or so. In fact, shares have fallen 10% over the last year even as the S&P 500 is up 16% during that time. Papa John's sales have struggled as a pan pizza promotion failed to drive growth and as the company loses share to Domino's and faces a challenge from Pizza Hut.
In its most recent quarter, domestic comparable sales increased just 1.4% and international comps were up 3.9%, which marked the 27th and 29th quarters of same-store sales growth, respectively. On the bottom line, EPS was up just 7% to $0.65, and operating income only increased 1%.
Management said it would increase its share repurchase authorization by $500 million, nearly 20% of the company's market cap, a sign that the company sees its stock is undervalued. It also said it would take on debt to fund the buybacks, increasing its financial leverage. Investors cheered to move, sending the stock higher, but the sluggish domestic growth may be of greater concern.
Who's got the better slice?
Beyond the headline numbers, both companies pay modest dividends with Domino's offering a yield of 0.9% and Papa John's 1.2%. Based on the P/E ratio, Papa John's shares are also cheaper, with a valuation of 25.7 compared to 39.2 for Domino's.
However, of the two companies, Domino's looks like the better pick today because of its strong momentum. The two companies have nearly the same business model with similar menus, franchising, and a comparable ratio of international restaurants to domestic ones, but Domino's brand and product has made it the better performer of late. I'm also concerned that the investor enthusiasm for Papa John's owes to its share buyback announcement, which is not a source of long-term advantage.
While Domino's investors should keep an eye an international sales, the company's momentum and popular delivery platform should help it continue to outperform the broader market.
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