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Domino’s Pizza, Inc. (DPZ), Papa John’s Int’l, Inc. (PZZA) & Yum! Brands, Inc. (YUM): 3 Stocks to Buy in the Improving Restaurant Sector

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The overall economy seems to be improving. Consumer confidence in June soared to 81.5, which is the higher reading in the last five years. The unemployment rate is slowly declining, and more jobs are being added.

This implies that citizens go to restaurant more often. Therefore, investors should gain exposure to the booming restaurant sector. The stocks herein mentioned present a great investment prospectus, and they should be considered for growth-oriented portfolios.

Bring me the pizza, Domino’s

Domino's Pizza, Inc. (NYSE:DPZ)

Domino’s Pizza, Inc. (NYSE:DPZ) is a large pizza restaurant with an international presence. The company trades with a price-to-earnings ratio of 26.7, slightly above the industry’s average of 22.9. The company posted upbeat revenue and net income for the first three months ending in March. Its revenue rose 10% to $418 million, and its net income increased by 50% to $34 million.

The company recently issued a $0.20 per-share dividend payment and  repurchased 362,000 shares. I believe Domino’s Pizza, Inc. (NYSE:DPZ) is in a great position to bring capital appreciation to its investors in these forms. Its cash from operations more than doubled to $48 million, and free cash rose from $17 million to $43 million. What’s more is that the free cash flow has been improving since 2008. I would expect dividend hikes and continuing share-repurchase programs from rising cash flow to bring capital appreciation.

Although the company faces competition in the United States from other pizzerias, its competition in the international markets is significantly lower. As global economic conditions improve, particularly in the emerging markets, revenue from overseas should improve significantly. China is of particular interest because its middle class is growing by the millions and the population is eating out more thanks to higher disposable income. Overall, same-stores overseas have experienced 5% growth. Continuing expansion in the Asia Pacific region will be key for future revenue growth.

The company submerged in debt in order for it to continue its expansion plans. It carries $1.5 billion in debt on its balance sheet, but it has a stockholder deficit of $1.3 billion. Its total liabilities/assets ratio is 337. Although several analysts do not agree with the company financing expansion through debt, I believe it was a great move. Domino’s Pizza, Inc. (NYSE:DPZ) took advantage of the ultra-low interest rates to finance the expansion, and its revenue should increase substantially.

Finally, the company is tackling the mobile-order market. The pizzeria just released a Windows 8 app for customers. It is claimed that it will reduce order-taking time, and it should increase order volume.

Overall, Domino’s Pizza, Inc. (NYSE:DPZ) is a great opportunity in the long run, and investors should have this stock in their portfolios.

The father of the pizzas (by personal taste)

Papa John’s Int’l, Inc. (NASDAQ:PZZA) is another pizza restaurant with carry-out or dine-in options. Its domestic market is great, but its international market is small. The company trades with a P/E of 23.6 compared to the 22.9 industry average. In the most recent quarter, revenue rose 10% to $356 million and net income rose 5% to $19 million, or $0.85 per share.

I do not expect Papa John’s Int’l, Inc. (NASDAQ:PZZA) to initiate a dividend payment or start a share-buyback program soon because Its free cash flow shrunk from $38 million to $17 million in the last quarter. However, I believe the company still has room for growth.

It is expanding in the U.S. and overseas. Last year, the company opened 280 stores overseas. Tackling China and India will be fundamental to overseas revenue growth, as its middle class continues to increase. For the fiscal year 2013, the company expects to open 134 additional stores. Also, capital expenditures are expected to rise to between $55 million and $60 million, up from $43 million last year.

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