Stock Wars: Papa John's Vs. Rave Restaurant Group

Benzinga’s weekly Stock Wars matches up two leaders in a major industry sector, with the goal of determining which company is the better investment.

This week, the duel is between a pair of restaurant chains specializing in pizza: Papa John’s International Inc. PZZA and Rave Restaurant Group, Inc. RAVE.

The Case For Papa John’s: The founding of Papa John’s has become one of the most repeated tales of entrepreneurial spirit: 23-year-old John Schnatter sold his prized 1971 Camaro Z28 to buy $1,600 of used pizza making equipment and then began selling his pizzas from a converted broom closet in his father’s tavern in Jeffersonville, Indiana.

Schnatter struck pizza gold and within nine years of his unlikely food service debut, his company went public.

Today, Louisville, Kentucky-based Papa John’s is the world’s third-largest pizza delivery company, operating a network of more than 5,400 restaurants in 50 countries and territories. Schnatter did a brilliant job in growing the company and for years served as the charismatic central focus of the Papa John’s marketing — but he became a liability when tactless comments related to the National Anthem protests by NFL players forced him to resign as CEO on New Year’s Day in 2018. Inappropriate racial verbiage leaked from a board meeting forced him out as chairman six months later.

Today, Schnatter’s mistakes are a distant memory for the company, which recently found itself on a PR winning streak. Earlier this month, Papa John’s announced that its Papa Rewards loyalty program reached its 20 millionth member — not bad for a program that began 11 years ago — and last month the company announced its franchise partnership with PJ Western Group to open 250 restaurants in the Germany over the next seven years.

The company gained a foothold in the Cambodian market in April and is seeking franchisees in Brazil, Japan and Southeast Asia.

In its first-quarter earnings report published in late March, Papa John’s reported $511.7 million in revenue, up from $409.8 million one year earlier, and net income of $33.8 million, up from $8.4 million. Earnings per diluted share rose to 82 cents from 15 cents while adjusted earnings per diluted share grew to 90 cents from 15 cents.

“Papa John’s started 2021 strongly, delivering our sixth straight quarter of industry outperformance and fourth of double-digit global sales growth,” said President and CEO Rob Lynch in announcing the quarterly earnings. “In addition, our unit growth accelerated, and we achieved 600 basis points of operating margin expansion, growing adjusted earnings per share 500%.”

Papa John’s is now trading at $112.26, slightly under its 52-week high of $113.34 and far from its 52-week low of $73.12.

The Case For Rave Restaurant Group: This company can trace its roots to Dallas-based brothers F.J. and R. L. Spillman, who opened their first Pizza Inn in 1958. Pizza Inn expanded across Texas and by the mid-1980s it became a Lone Star State pop culture fixture thanks to a playful television advertising campaign featuring the muscular Von Erich brothers of professional wrestling fame.

Pizza Inn Holdings expanded in June 2011 with a fast casual restaurant concept called Pie Five Pizza, which specialized in creating customizable pizzas made within 5 minutes of an order being placed. Four months later, the company went global with its first international eatery in Hangzhou, China. The company renamed itself Rave Restaurant Group in January 2015 and now owns, operates, franchises and/or licenses 137 U.S.-based Pizza Inn Units and 35 U.S. Pie Five units (mostly in Southeastern and Southern states) plus 33 international Pizza Inn locations.

Not unlike Papa John’s during the tail end of Schnatter’s leadership years, Rave has seen its share of drama: it was threatened with Nasdaq delisting in July 2020 and January 2021 when its stock sank below the exchange’s $1 minimum price bid requirement, and it was sued in February by Scott Crane, who served as CEO from January 2017 until July 2019 and demanded nearly $2.4 million in damages in a breach of contract lawsuit.

On the positive side, however, Rave has brought in new senior executives recently to expand its franchising opportunities and corporate operations, and it has been working hard to expand its menu offering with a line-up of new recipes that include Pie Five Pizza’s parmesan crunch stuffed crust pizza and an Impossible Tuscan pizza made from plant-based meatballs, along with an updated crust recipe featuring buttery garlic and a combination of Romano and parmesan cheeses for Pizza Inn’s servings.

The company recently signed agreements for four new locations in North Texas and a new Pizza Inn Express store in Arkansas, the 28th location in the state.

In its most recent third-quarter report May 6, Rave reported revenue of $2.1 million, down from $2.7 million one year earlier, and net income of $400,000 compared to a net loss of $4.5 million in the third quarter of 2020. Income per basic common stock and diluted common stock was 2 cents for the quarter, compared to a 30-cent loss one year earlier.

"We are pleased that the heroic efforts of our management, franchisees, and team members have resulted in another profitable quarter amidst a pandemic and significant government restrictions," said CEO Brandon Solano. "While we are pleased with this quarter's results, much work remains. We intend to continue our focus on innovation, operations consistency, technology upgrades, and cost controls to drive value and consistency for our customers and shareholders and position Rave, Pizza Inn and Pie Five for long term success."

Rave is now trading at $1.35, sandwiched between its 52-week high of $2.36 and its 52-week low of 38 cents.

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The Verdict: Really, who doesn’t love pizza? And what could be more enjoyable than researching and trading stocks while enjoying a nice hot slice of pizza?

Papa John’s is a solid fixture in its industry and its stock is performing well. For institutional and retail investors looking for a conservative, long-haul investment, this company checks all of the boxes.

Rave, however, is somewhat under the proverbial radar. Unlike Papa John’s national reach, Rave is a regional operation and might be an unknown quantity to investors outside of its footprint. And for those who only know the company from its media coverage, the recent internal tumult may not build confidence.

However, for stock traders — especially those who take their cue from Reddit — Rave’s highly affordable share price is as tempting as its pizza slices. And after too much internal drama, the company appears to have gotten its act together with menu and franchise expansions designed to drive home more revenue.

While you can't go wrong with Papa John’s shares, in this Stock Wars duel we’re giving the nod to Rave. For those who don’t mind a side order of volatility with their pizza, we’re betting that Rave could emerge as a happy surprise within the food service sector.

Photos: Papa John’s photo by Mr. Blue Mau Mau/Flickr Creative Commons; Pizza Inn photo by Rave Restaurant Group; pizza slice photo by Marker Photography on Pixabay.