Better Downturn Performance, Better Marketing, Papa Johns

| About: Papa John's (PZZA)

Summary

The company has a very effective marketing strategy, is growing, and pays a dividend.

Recent analysts upgrades rate the stock a buy due to strong growth potential.

The consumer discretionary space continues to thrive in the low gas price environment, with most of the gas savings going to restaurants.

Papa John's (NASDAQ:PZZA) is a leading fast food pizza chain that operates throughout the United States and is firing on all cylinders at the moment. The most recent earnings report showed impressive 12% quarterly YoY earnings growth on flat revenue. While the company has benefited from the tailwind of low gas prices helping lift both the performance of the business and the stock, the business model should receive the lion's share of credit for this strong performance.

PZZA's slogan, "Better ingredients. Better pizza." is very simple and effective. And while the pizza may or may not be "better" or have "better" ingredients than its competitors, its marketing and performance has been better over the last few quarters. In fact, the slogan has been so effective that the company has been sued in the past by its competitors who claimed that PZZA does not provide proof that it is "better" than others in the market. This is just proof that the slogan works and the wording of it is genius because it doesn't say who it's better than nor how it's better, but implies a general superiority in very few words. That's great marketing.

Many companies in the consumer discretionary space have been doing very well, but fast food has been benefiting more than most. Data shows that consumers are spending up to 80% of their gas savings and most of that is going to restaurants. With the average American spending over $2,000 per year on gas before prices started to drop late last year, that means the average American is spending over $1,000 a year at restaurants based on current gas prices. This has been and continues to be a huge boon for the restaurant industry.

But this company has a lot more going for it than just a friendly macro economic environment, which the most recent earnings report clearly showed. While 12% earnings growth may not be the kind growth that the giant tech companies like Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX) have been putting up, the stock doesn't trade at a high multiple like those companies either. With a more modest forward P/E of 20 compared to P/Es in the hundreds for those tech companies, PZZA is trading right around average for the market in terms of valuation, but is growing more rapidly than an average company.

Analysts seem to agree with this assessment with two major brokers from Sidoti and KeyBanc Capital Markets recently upgrading the stock to a "buy" and "overweight". The overweight rating indicates the stock is outperforming the market and its industry, which I believe it will continue to do based on the company's strong recent performance, excellent marketing, and great management. 26% of the company's stock is held by insiders, which is a very good indication that management has an incentive to behave in a way that will benefit shareholders.

This may seem like a basic assumption of business in general but it is surprising how often corporate management's interests are actually not in line with those of shareholders due to many executive remuneration packages being heavy on salary and low on stock options. When management has a large amount of stock and less of their compensation in the form of a cash salary, they have a very strong incentive to help the company perform in such a way that will boost the stock price and reward shareholders rather than just try to get their golden parachute and walk away as soon as possible.

While the modest 1.45% dividend may not impress dividend seeking investors, together with the company's growth and modest valuation the stock is attractive at current levels. With an effective marketing strategy and strong fundamentals combined together, investors should be confident that as long as gas prices remain low and the company is growing at the current pace, they will receive a nice return on investment.

In short, with PZZA you get a very well rounded company that is both growing and paying a dividend. The fundamentals are strong, and management has shown that it knows how to increase earnings and run the business well. In the current environment of increased volatility, you could do a lot worse than PZZA and I expect the stock to be trading around $70 a share when the current market turmoil subsides and investors come to their senses. This is in line with the mean price target that 7 other brokers have on the stock as well.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.