Why You Should Eat Up Papa John's Stock Over Domino's Pizza

Investors looking for exposure to pizza restaurant stocks should consider picking Papa John's Int'l, Inc. PZZA over Domino's Pizza, Inc. DPZ, according to BMO Capital Markets.

The Papa John's And Domino's Analyst: Andrew Strelzik initiated coverage of Papa John's stock with an Outperform rating and $105 price target. Strelzik also initiated coverage of Domino's Pizza's stock with a Market Perform rating and a $400 price target.

The Papa John's Thesis: Papa John's was the victim of "self-inflicted wounds," but has since recovered and is now poised to drive growth over the coming years, Strelzik wrote in the initiation note. In fact, Papa John's realized the greatest improvement in brand recognition within the pizza category before the COVID-19 pandemic.

Papa John's leveraged its improved brand name with digital initiatives and consistent new product launches to keep consumers engaged. Management is sticking to its growth formula that has shown results and plans on introducing four to five new product launches and limited-time offerings annually.

"PZZA is not a one-hit COVID wonder as we see an attractive multi-year opportunity to drive sales supported by improving brand perception, more impactful strategy, and category tailwinds," the analyst wrote.

The company also has an opportunity to grow its store count as just 19% of all U.S. stores have another location within three miles. This is roughly half the levels of Domino's and makes it clear Papa John's has "ample room" to expand its footprint.

Finally, Papa John's could accelerate its cash returns to shareholders or create additional value through strategic actions like shifting the franchise mix to become more in line with its peer group (in the mid-90% range).

Related Link: Domino's, Papa John's Deliver Disappointing Earnings: Here's What Happened

The Domino's Thesis: A bullish case on Domino's stock is difficult to justify at this time as there is reason to believe its COVID-19 momentum is slowing, Strelzik wrote in the initiation note. Most notably, U.S. app downloads have been slowing relative to 2020 levels over the past few months and this could be a leading indicator.

A near-term cautious approach is warranted ahead of Domino's 2021 performance as expectations for out-of-home dining experiences make the case for Domino's losing out on sales gains.

Nevertheless, Domino's deserves credit for its longer-term strategy, outlook and opportunities, the analyst wrote. The pizza chain's growth profile and system sales growth opportunities remain unchanged given a premium global brand, digital leadership, ongoing innovation initiatives and an attractive cash flow profile.

"We believe DPZ's risk/reward skews to the upside, but expect shares to remain somewhat out of favor until visibility improves around the comp and earnings outlook against the upcoming challenging same-store sales laps in 2Q/3Q21 or DPZ approaches easier comparisons post those two quarters," the analyst wrote.

PZZA Price Action: Shares of Papa John's are down 0.27% at $86.38 early Tuesday afternoon.
DPZ Price Action: Shares of Domino's are down 1.46% at $366.66 early Tuesday afternoon.

(Photo: Ildar Sagdejev via Wikimedia Commons)