Order Out With These Three Quick-Service Pizza Stocks
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three quick-service pizza delivery and carryout restaurant stocks. With the growth in delivery and health-conscious options, should you consider the stocks of Domino’s Pizza Inc. (DPZ), Papa John’s International Inc. (PZZA) and Yum China Holdings Inc. (YUMC)?
Pizza Stocks Recent News
The coronavirus pandemic impacted restaurants significantly, causing them to adapt in favor of e-commerce and delivery. However, due to the nature of quick-service pizza restaurants such as Domino’s, they weren’t nearly as affected as most. For Domino’s, save for the firm’s rollout of contactless car-side carryout, very little changed. Companies already had an online delivery service built out that benefited them during the downturn.
The global fast-food market was valued at around $703 billion in 2021 and is expected to grow at a compound annual growth rate (CAGR) of 4% until 2030. The desire for on-the-go snacks, convenience foods and ready meals is driving growth in the fast-food industry. Fast-food consumption has been influenced by millennials’ busy lifestyles and the global rise of working people.
Delivery has been one of the key trends in fast food over the last few years. Namely, third-party services such as Uber Eats, Grubhub and DoorDash have grown rapidly in popularity since 2018. While this poses a threat to traditional pizza delivery, carryout has reemerged as the primary driver of sales growth, consistent with the prevailing pre-pandemic dynamic.
Overall, pizza restaurants proved to be resilient through the difficulties of the pandemic. Increasingly hectic lifestyles and strong carryout sales potential are key drivers for the industry. Over the next few years, it will be important to monitor the growth of health-conscious consumers.
Grading Pizza Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been indicated by research and real-world investment results to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three pizza stocks — Domino’s, Papa John’s and Yum China — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Pizza Stocks
What the A+ Stock Grades Reveal
Domino’s Pizza Inc. (DPZ) is a quick-service restaurant company. It operates through three segments: U.S. stores, supply chain and international franchise. The U.S. stores segment includes operations with respect to all franchised and company-owned stores throughout the U.S. Its U.S. stores segment consists of over 6,185 franchised stores and also operates a network of approximately 375 U.S. company-owned stores. The supply chain segment primarily includes the distribution of food, equipment and supplies to stores from the company’s supply chain center operations in the U.S. and Canada. The international franchise segment primarily includes operations related to the company’s franchising business in foreign markets. It operates over two distinct service models within its stores, which include delivery and carryout. The company is operating pizza restaurants in approximately 18,800 locations in over 90 markets.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Domino’s has a Quality Grade of A with a score of 92. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its return on assets, gross income to assets and return on invested capital. Domino’s has a return on assets of 27.0%, a gross income to assets of 99.8% and a return on invested capital of 74.6%. The sector median return on assets and gross income to assets are 2.4% and 30.1%, respectively. However, Domino’s ranks poorly in terms of its Z-Score, in the 15th percentile.
Domino’s has a Momentum Grade of C, based on its Momentum Score of 45. This means that it is average in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of 2.0% in the most recent quarter and 19.8% in the third-most-recent quarter, offset by a below-average relative price strength of –14.8% in the second-most-recent quarter and –27.0% in the fourth-most-recent quarter. The scores are 70, 25, 82 and 18 sequentially from the most recent quarter. The weighted four-quarter relative price strength is –3.6%, which translates to a score of 45. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
The company has a Value Grade of D, based on its Value Score of 26, which is considered expensive. This is derived from a high ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) of 19.4 and a price-to-free-cash-flow (P/FCF) ratio of 48.7, which rank in the 81st and 80th percentiles, respectively. Domino’s has a Growth Grade of A based on a score of 94. The company has had strong year-over-year sales increases for the last five years.
Papa John’s International Inc. (PZZA) operates and franchises pizza delivery and carryout restaurants and, in certain international markets, dine-in and delivery restaurants under the trademark Papa John’s. The company operates through four segments: The domestic company-owned restaurant segment consists of the operations of all domestic company-owned restaurants; the North America commissaries segment comprises approximately 11 full-service regional dough production and distribution quality control centers in the U.S.; the North America franchising segment consists of franchise sales and support activities; and the international operations segment principally consists of distribution sales to franchised Papa John’s restaurants located in the U.K. The company operates approximately 5,650 Papa John’s restaurants in operation, consisting of 600 company-owned and 5,050 franchised restaurants operating in 50 countries and territories.
The company has a Value Grade of C, based on its Value Score of 43, which is considered to be average. Higher scores indicate a more attractive stock for value investors and, thus, a better grade.
Papa John’s Value Score ranking is based on several traditional valuation metrics. The company has a rank of 16 for shareholder yield, 43 for the price-to-sales (P/S) ratio and 86 for the price-earnings (P/E) ratio (with the higher the rank being better for value). The company has a shareholder yield of 5.1%, a price-to-sales ratio of 1.38 and a price-earnings ratio of 43.6. The company has an enterprise-value-to-EBITDA ratio of 14.3, which translates to a rank of 70.
The Value Grade is based on the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-free-cash-flow ratio and price-to-book (P/B) ratio. The rank is scaled to assign higher scores to stocks with the most attractive valuations and lower scores to stocks with the least attractive valuations.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, Papa John’s has an Earnings Estimate Revisions Grade of D, which is negative. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Papa John’s reported an earnings surprise for third-quarter 2022 of –11.0%, and in the prior quarter reported an earnings surprise of –0.8%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has remained the same at $0.807 per share despite 10 downward revisions. Over the last three months, the consensus earnings estimate for full-year 2022 has decreased 0.1% from $2.891 to $2.889 per share due to two downward revisions.
Papa John’s has a Quality Grade of A with a score of 86. The company ranks strongly in terms of its gross income to assets and buyback yield. The company has a gross income to assets ratio of 76.5% and a buyback yield of 3.1%. The sector median buyback yield is –0.1%, well below Papa John’s. The company ranks below the sector median for return on invested capital.
Yum China Holdings Inc. (YUMC) is a restaurant company that franchises or has ownership in entities that own and operate restaurants. Its segments include KFC, Pizza Hut Casual Dining and other segments, including Little Sheep, Huang Ji Huang, Lavazza, COFFii & JOY, Taco Bell, East Dawning, Daojia and its e-commerce business. KFC is the quick-service restaurant (QSR) brand in China. KFC operates approximately 8,100 restaurants in more than 1,600 cities across China. Pizza Hut is the casual dining restaurant brand in China. Pizza Hut operates approximately 2,500 restaurants in over 600 cities. Huang Ji Huang is a Chinese-style casual dining franchise restaurant brand with over 600 restaurants in China and international markets. Little Sheep is a hot pot restaurant in China with over 222 units in both China and international markets. Taco Bell is a QSR brand specializing in Mexican-style food. COFFii & JOY features specialty hand-dripped coffee.
Yum China has a Quality Grade of A with a score of 90. The company ranks strongly in terms of its return on assets, Z-Score and buyback yield. Yum China has a return on assets of 7.0%, a Z-Score of 7.32 and a buyback yield of 0.5%.
Yum China has a Momentum Grade of A, based on its Momentum Score of 84. This means that it is well above average in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative price strength is 8.4%.
Yum China reported a positive earnings surprise for third-quarter 2022 of 59.6%, and in the prior quarter reported an earnings surprise of greater than 100%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has decreased from $0.487 to $0.477 per share due to one downward revision. Over the last month, the consensus earnings estimate for full-year 2022 has decreased from $1.105 to $1.095 per share, based on two downward revisions.
The company has a Value Grade of D, based on its Value Score of 24. This is derived from a higher than average price-earnings ratio of 27.1 and a shareholder yield of 1.4%, which rank in the 72nd and 32nd percentiles, respectively. Yum China has a Growth Grade of A based on a score of 90. The company has had strong sales growth over the last five years.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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