Two of the most popular foods in America are pizza and wings. Domino’s Pizza, Inc. (NYSE:DPZ) and Papa John’s Int’l, Inc. (NASDAQ:PZZA) are two of the big players in the pizza industry, while Buffalo Wild Wings (NASDAQ:BWLD) is rapidly growing its share of the wings market. All three stocks have surged over the past three years:
Is there any value left in these stocks? Or have they run up too far too fast?
No longer cardboard and poised to grow
Domino’s Pizza, Inc. (NYSE:DPZ) is possibly best known for its ad campaign a few years ago which likened its own crust to cardboard. The company completely reformulated its recipes using higher quality ingredients, leading to a far superior end product. This campaign, while risky, got people talking about Domino’s.
The company opened its 10,000th store last year and is banking on strong international growth to drive it forward. While the pizza industry in the U.S. is extremely fragmented in many international markets, Domino’s faces very little competition. This, along with gaining more share in the U.S., gives Domino’s Pizza, Inc. (NYSE:DPZ) a path to sustained growth.
After growth stagnated in the first part of last decade and the recession took its toll, the push for higher quality pizza put Domino’s on the path to growth once again. From 2009 to 2012 Domino’s grew revenue by nearly 20% and EPS by nearly 40%. The stock has increased by a staggering 360% over the past three years, greatly outpacing this growth. It seems that investors have become increasingly optimistic regarding Domino’s Pizza, Inc. (NYSE:DPZ) future.
One big problem that Domino’s has is its balance sheet. Domino’s has a total debt load of about $1.6 billion on which it paid $100 million in interest last year. Considering that this interest ate up more than a third of the operating profits, the debt seems excessive to me. The stock trades around $60 per share, but the company has about $26 per share in debt.
Domino’s Pizza, Inc. (NYSE:DPZ) owner earnings for 2012, which includes the tax-adjusted interest, works out to $2.94 per share. Adding the net debt to the stock price, Domino’s trades at 29 times owner earnings., similar to its current P/E ratio.
The massive debt really kills Domino’s for me. A ratio of 20 would be reasonable given the growth prospects, but 30 is just not realistic. Domino’s started paying a dividend earlier this year and has been buying back some shares, but it would be a better use of cash to pay down the debt. Aggressively paying off the debt would leave more cash freed up down the line for a larger dividend and more meaningful share buybacks, which would ultimately benefit shareholders more than wasting so much on interest payments. Domino’s is overpriced, and its excessive debt is concerning.
A slightly better pizza option
Papa John’s Int’l, Inc. (NASDAQ:PZZA) also has its sights set on the international market, with more new international restaurants set to open this year than domestic restaurants. Slightly smaller than Domino’s in terms of revenue, Papa John’s Int’l, Inc. (NASDAQ:PZZA) has seen its growth pick up since 2009. Revenue has grown by 21% and EPS has grown by 25% since that time, and there’s no reason to believe that this strong growth won’t continue.
Papa John’s Int’l, Inc. (NASDAQ:PZZA) has a far cleaner balance sheet than Domino’s Pizza, Inc. (NYSE:DPZ), with just $109 million in debt and $25 million in cash. The net debt works out to about $4 per share, much less impactful to the $66 share price than in Domino’s case. Owner earnings work out to about $2.60 per share, which puts the stock price adjusted for the debt at about 27 times this value.
Papa John’s Int’l, Inc. (NASDAQ:PZZA) is slightly less expensive than Domino’s, and given its nicer balance sheet it seems like the obvious choice. The growth prospects of both companies are similar with both focusing on international markets. Domino’s Pizza, Inc. (NYSE:DPZ) has a first-mover advantage in some countries, but Papa John’s Int’l, Inc. (NASDAQ:PZZA) isn’t too far behind.
Papa John’s Int’l, Inc. (NASDAQ:PZZA) is still expensive, though, and the price is higher than the growth prospects warrant. It seems that there’s isn’t any value in the pizza business, or at least in these two major companies.
Fast growth, delicious wings
Buffalo Wild Wings (NASDAQ:BWLD) is one of the faster growing chains out there, with revenue nearly doubling since 2009 to $1.04 billion. The company is using most of its cash flow to expand rapidly, and to the company’s credit it isn’t financing this growth with debt. Capital expenditures have been increasing about as fast as revenue growth as new stores are opened, and this seems likely to continue.
Because the company is in a rapid growth phase the EPS is probably the most relevant value to look at. The company is currently trading at 32 times earnings, higher than both Domino’s and Papa John’s Int’l, Inc. (NASDAQ:PZZA).
It’s hard to pay 32 times earnings for any company, especially a restaurant chain. Growth should be solid in the coming years, with analysts expecting 18% annual earnings growth, but with the amount of competition in the casual dining space I just can’t imagine paying this high of a price. There’s nothing really special about Buffalo Wild Wings (NASDAQ:BWLD). It’s a sports bar with wings, burgers, and beer. It competes with plenty of local and regional restaurant which all do essentially the same thing. Margins have declined in the past few years, with a gross margin of 24.2% and an operating margin of 7.9% in 2012. I just don’t see what people are excited about here.
The bottom line
Pizza and wings stocks have appreciated by enormous amounts over the past three years, and they seem significantly overvalued after that rise. Each company has the capability of strong growth, but the price is too high relative to that growth to consider the stocks. Buying a Domino’s Pizza, Inc. (NYSE:DPZ) may be a value, but the stock sure isn’t.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings (NASDAQ:BWLD). The Motley Fool owns shares of Buffalo Wild Wings (NASDAQ:BWLD) and Papa John’s Int’l, Inc. (NASDAQ:PZZA).
The article Is There Value in Pizza and Wings? originally appeared on Fool.com.
Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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