Stifel Upgrades Embattled Papa John's On Lowered Expectations

Papa John’s International, Inc. PZZA is executing new strategies to restore confidence among investors and customers after the departure of founder John Schnatter in a racism scandal, according to Stifel. 

The Analyst

Stifel analyst Chris O'Cull upgraded Papa John’s from Sell to Hold and increased the price target from $35 to $38.

The Thesis

Investor expectations are now reset to a reasonable level after poor second-quarter results and lowered Wall Street estimates, O'Cull said in a Tuesday note. (See the analyst's track record here.) 

In the short-term, Papa John's performance should improve with the help of aggressive promotions, the analyst said. One of the most prominent is the recently launched Meat Pizza Deal, which includes a medium pizza with pepperoni, sausage, beef, bacon and Canadian bacon for $6.99.

“We surmise franchisees have agreed to this low-margin promotion because of the financial assistance the company is providing. And, while improving sales from this promotion may not benefit profits, it should help attract lapsed consumers,” O’Cull said.

Earlier this month, Papa John’s announced its plans to provide temporary financial assistance for domestic franchise partners. This assistance includes reductions in royalty, commissary prices and online fees.

“The company will provide additional funding to support new marketing and re-imaging initiatives consistent with the brand's new direction. The cost of the program is expected to range between $30 million and $50 million for 2018,” O’Cull said.

Papa John's developed agreements with franchises to reset commissary prices as a means of maintaining the annual margin, the analyst said. Yet store closures may pose problems for the margin in the event that the company allocates costs for the commissary across a smaller group, O'Cull said.

"As a result, we believe it's imperative for the company to limit the number of store closures, which could result in the company continuing franchise support in 2019." 

Price Action

Papa John’s shares were trading up 1 percent to $43.44 at the time of publication Wednesday.

Related Links:

Jefferies Finds A Reason To Order Papa John's

Stifel Downgrades Papa John's To Sell Amid 'Fraternal Corporate Culture'