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4 Reasons to Add Papa John's (PZZA) Stock to Your Portfolio

World’s third largest pizza delivery company, Papa John’s International, Inc. PZZA looks promising at the moment. The stock has gained 1.5% over the past three months, outpacing the industry‘s decline of 3.1%.

Given this Zacks Rank #2 (Buy) company’s solid progress on the fundamentals, we believe that this is the right time to add the stock to your portfolio as it is poised to carry the momentum ahead.

Earnings and Sales Growth: Papa John’s makes for a great pick in terms of growth investment. Arguably, nothing is more important than earnings growth as surging profit levels is often an indication of strong prospects (and stock price gains) ahead for the company in question.

While Papa John’s has a historical (last 3-5 years) earnings per share (EPS) growth rate of 18.5% compared with the industry’s average of 10.2%, investors should really focus on the projected growth. In the current year, the company is looking to grow at a rate of 11.8%, higher than the industry average of 4.4%.

Propelling the earnings forward is the company’s solid revenue growth story. While, the projected sales growth for the current year is pegged at 4.5%, the broader industry is estimated to grow a mere 0.4%.

We note that Papa John’s continues to gain on its commitment to provide quality food that appeals to health-conscious customers. Meanwhile, besides product innovation, the company is also focused on digital innovation and continues to enhance its digital ordering process to attract new customers and drive growth as well as efficiency.

In fact, all these reasons substantiate the company’s Growth Score of B on our Style Score System that helps us to identify potential outperformers.

Strong Expansion Plans: International expansion has been the backbone of Papa John’s operations for quite some time now. Evidently, many of the company’s restaurants are located in the international markets like Europe, the Middle East, Latin America and China, where they continue to perform strongly.

Markedly, second-quarter 2017 marked the 29th consecutive quarter of positive comps in the international segment.

Currently, the company has 1660 international restaurants in 44 countries. It is also planning to expand in Brazil, Honduras, Uruguay and the Bahamas. Interestingly, the brand has started to move into the Northern Africa region anticipating opportunities therein, and eventually wants to enter South Africa as well.

Additionally, this pizza delivery chain has inked developmental agreements in many regions like Mexico, Egypt, Russia, Spain, Chile, the Netherlands, Colombia and Boston.

Papa John's continues to fortify its presence throughout Europe too. It operates over 350 restaurants in the United Kingdom and is expected to continue gaining significantly from this market.

Superior ROE: Papa John’s trailing 12-month return on equity (ROE) supports its growth potential. The company’s ROE of a whopping 919.8% widely surpasses the industry’s average ROE of 6.6%. In fact, the stock offers the highest ROE in the industry, reflecting the fact that it is more efficient in using shareholders’ funds.

In this regard, it is also noteworthy that more than 85% of the company’s restaurants are franchised at present. The company’s plans to increase its international units – as mentioned above – are all in sync with the existing situation as a large part of these will be franchised. We believe re-franchising a large chunk of its system reduces a company’s capital requirements and facilitates EPS growth and ROE expansion. Alongside, free cash flow continues to grow, allowing reinvestment for increasing brand recognition and shareholder return.

Thus, Papa John’s remains poised to continue providing superior return on equity.

Low Beta Stock: A stock with beta less than 1 suggests that the price movement of the stock is not highly correlated with the market. Since they are less volatile than the market, they are safer bets. Papa John’s has an impressive beta of 0.5. Adding it to your portfolio brings down your portfolio’s overall beta, thereby reducing its risk.

Key Picks

Some other top-ranked restaurant stocks from the same space include Domino’s Pizza, Inc. DPZ, Bravo Brio Restaurant Group, Inc. BBRG and Restaurant Brands International, Inc. QSR. All these companies hold the same bullish rank as Papa John’s. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the trailing four quarters, Domino’s, Bravo Brio and Restaurant Brands pulled off an average positive earnings surprise of 6.75%, 7.01% and 6.46%, respectively.

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