Better Buy: Domino’s vs. Papa John’s

FAN Editor

With all of the technological, political, and sociological disruption going on in the markets, there is one constant in American life that will always thrive: pizza. Whether in bull markets or bear markets, recessions or boom times, on special occasions or for everyday meals, people love a hot, fresh pizza — especially one that’s delivered to them quickly and affordably.

So now seems like a great time to dissect two of the pure plays in the pizza delivery space: Domino’s (NYSE: DPZ) and Papa John’s (NASDAQ: PZZA). Which national pie-slinger is the better buy today?

Continue Reading Below

Owned vs. franchised

One of the important things to understand about any restaurant stock is how many of its restaurants it owns versus how many restaurants are franchised to outside parties. Franchisees usually pay the parent company a mid-single-digit percentage of sales, and also pay the parent for food, equipment, and other supplies.

While franchising produces lower overall profits for the parent company in terms of actual dollars, it’s generally the preferred model for investors, as it’s usually less risky for the parent company than owning stores and results in higher margin. Here are owned-versus-franchised metrics for each company in this matchup.

As you can see, Domino’s is larger, more global, and more franchised. Strong operating performance, combined with a more franchised operation, has also given the company a much higher operating margin. Adjusted for franchise sales and impairments, Domino’s had an operating margin of 18.6% in 2017, versus Papa John’s operating margin of 8.56%.

Winner: Domino’s.

Growth

Of course, a franchise model doesn’t mean much if you can’t grow sales. In restaurants, there are several aspects to growth, including adding more stores and boosting sales at existing locations. Same-store sales are usually looked at as a barometer of retailer health. Here are growth metrics for these two companies.

2017 Metric

Domino’s

Pizza Hut

Unit growth

7.6%

2.0%

Same-store sales at domestic owned locations

8.7%

0.4%

Same-store sales at domestic franchised locations

7.6%

(0.1%)

International same-store sales

3.4%

4.4%

Overall growth

12.8%

4.1%

On almost every count, it’s no contest: Domino’s seems to have the secret pizza sauce. It wins on unit growth, domestic same-store sales, and overall revenue growth, while barely trailing Papa John’s in international same-store sales.

Winner: Domino’s.

Valuation

How do each of these companies stack up valuation-wise? Let’s take a look at two different measures of performance. The first is the forward price-to-earnings ratio, which uses earnings estimates and the stock’s per-share price to value a stock. The second is the enterprise value-to-EBITDA ratio, which counts both the company’s equity and debt, divided by its earnings before interest, taxes, depreciation and amortization.

As you can see, Papa John’s is less expensive on both counts. While it’s only slightly less expensive than Domino’s on a price-to-earnings basis, it’s much less expensive than Domino’s on an EV-to-EBITDA basis.

That’s because Domino’s has less depreciation than it otherwise would, due to not owning as many stores, equipment, and fixtures — an effect of having a more franchise-based business model. Also, due to its less risky profile and strong operating performance, Domino’s has taken on much more debt to fund shareholder returns, as you can see from the debt-to-EBITDA ratios in the chart below.

Papa John’s has less debt and is also less expensive, so it gets the nod here.

Winner: Papa John’s.

The verdict

Despite Papa John’s having less debt and a lower valuation, I’m going with Domino’s as the better buy. The company’s emphasis on value, speed, technological innovation, and franchising seems to have given it a more dynamic business model, resulting in faster growth and higher returns. To me, that offsets the lower valuation of Papa John’s. With forward price-to-earnings ratios in the 20s, neither is especially a value stock, and Domino’s is clearly growing faster. Therefore, I’m going to go with the growth — and that’s clearly Domino’s.

Phew! I’m hungry, let’s order a pie!

10 stocks we like better than Domino’s PizzaWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Domino’s Pizza wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 2, 2018

Billy Duberstein has no position in any of the stocks mentioned. His clients may have positions in some of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Free America Network Articles

Leave a Reply

Next Post

Is Corning Stock a Buy?

Corning Inc. (NYSE: GLW) isn’t a flashy, headline-grabbing tech stock, but it supplies key components to technologies we use every day. Its specialty glass goes into LCD screens large and small, its fiber optic cables play a key role in the modern telecommunications infrastructure, and its Gorilla Glass can be […]