This Recession-Resistant Stock Should See Tremendous Growth Ahead
This often overlooked industry serves 93% of Americans each month. And this one stock is perfectly positioned for incredible gains.
By Jay Peroni, CFP®
As the presidential election cycle heats up, everyone starts paying more attention to the economy’s overall health. And according to recent nationwide USA Today/Gallup polls, most voters say their finances haven’t improved during the past four years. The truth is most families are still cautious with their spending and this trend doesn’t seem to be changing anytime soon.
During the lean times, it is smart for investors to look for recession-resistant stocks. With consumers saving more of their hard-earned cash, spotting where they are spending can often be a key to success. There are obvious places (food, energy and health care), but there are also some amazing overlooked opportunities.
As I pour through hundreds of stock reports and ideas each week, I’m consistently reminded of a business that’s right in front of me each day, no matter which city I’m in or where life may take me.
Operating in a $32 billion industry, this type of company has more than 61,269 retail operations in the United States alone. Even though this type of business is so obvious, many investors fail to see the potential gains.
Consumers have continued to eat out, even in a shaky economy. Instead of fancy meals, however, they have opted for casual dining, with tight budgets in mind. You have most likely visited this type of restaurant during the past month or have ordered delivery of this highly-demanded food.
Pizza restaurants are a popular place for families in good times and bad. Pizza restaurant growth continues to outpace overall restaurant growth, with pizzerias representing 17% of all restaurants in the United States. Believe it or not, 93% of Americans eat at least one pizza a month, with two-thirds ordering pizza for a casual evening with friends or family. On average, each American consumes about 46 slices or 23 pounds of pizza per year.
Most pizzeria’s are local mom-and-pop shops, so there is only three major pure-play publicly-traded pizza stocks – Dominoes (NYSE: DPZ), Papa John’s International (NASDAQ: PZZA) and Pizza Inn Holdings (NASDAQ: PZZI). Of course, there is Yum Brands (NYSE: YUM), which carries the Pizza Hut brand, but that’s not a pure-play stock — the company also owns KFC and Taco Bell, among others.
Of the major pizza stocks, one stock stands out as my favorite because of expansion plans, its disciplined strategy and commitment to shareholder value — Papa John’s International (NASDAQ: PZZA).
How it all started…
Papa John’s International was founded in 1985 in Louisville, Ky. As a high school student working at a local pizza pub in Jeffersonville, Ind., Papa John’s Founder John Schnatter felt there was something missing from national pizza chains — a superior-quality traditional pizza delivered right to the customer’s door. From day one, Schnatter refused to sway from that commitment to quality. It worked, and people loved his pizza.
Today, more than 25 years later, this major pizza retailer owns or franchises more than 3,500 restaurants in all 50 U.S. states and 29 countries. In addition, it has major expansion plans to open 25 new stores in the U.K., taking its total number of outlets to 200 in the U.K. by the end of 2012.
One key differentiator has been its commitment to fresh (never frozen) ingredients, convenient ordering, friendly and helpful staff and efficient delivery to keep customers coming back. With the added convenience of online ordering using a computer, mobile app and text-messaging, customers can now place “plan ahead” orders for future delivery.
Its innovative technology for “plan ahead” orders and rapid expansion plans alone make Papa John’s an attractive investment opportunity. But when you look at the stock’s fundamentals, you can really see how this is a no-brainer investment…
This stock has great upside potential as they have low debt (around $181 million in total liabilities) and strong cash flow ($113 million) in this tough economic environment. In the second quarter of the year, the company brought in $318 million in revenue, about $12 million more than expected, an increase of 8.5% from previous year. Management is continuing to buy back shares and franchises, which should greatly benefit shareholders.
Additionally, the price-to-earnings (P/E) ratio is low at 15.4 compared with 19.9 for the industry average. Papa John’s reported second-quarter 2012 adjusted earnings of 61 cents a share, which topped last year’s 47 cents. The company has now delivered positive earnings surprises for four straight quarters with an average beat of 16.2%.
Since 2009, Papa John’s has been on a roll… See the chart below.
Risks to Consider: Though Papa John’s has seen tremendous growth during the past five years, the rising cost of ingredients is driving up consumer pizza prices. This could reduce demand and profitability. Pizza is a highly competitive industry and changes in consumer preferences could affect future sales.
This Week’s Takeway: I have been looking for a good pizza stock for some time and Papa John’s Pizza (NASDAQ: PZZA) has always been a favorite of mine. The stock is attractively priced right now and should see tremendous growth ahead. I blieve that it is a great buy under $55 a share. The stock should hit $65 a share in the next 12-18 months.
Disclaimer: Investing involves risk. Always do your own due diligence and consult a trusted financial professional before making any investing or financial decisions. Jay Peroni is a Certified Financial Planner and is part of our Christian Financial Advisor Network
About the Author
Jay Peroni, CFP (Certified Financial Planner, Money Manager)
Jay Peroni is a Certified Financial Planner and investment advisor with 16 years of money management experience. He is a public speaker, and is the author of The Faith-Based Millionaire. He is a leading authority on the subject of Faith-Based Investing. He is a frequent contributing writer to FTMDaily.com and provides regular market commentary for the FTMWeekly Radio program. In addition, Jay manages Jerry Robinson’s own P.A.C.E. Investment Portfolio. If you have a stock investing question, contact Jay at (888) 664-6963 or by email at firstname.lastname@example.org.