Money. Pizza. Respect: Roughly Valuing Papa John’s (PZZA)

First, you get the money. Then you get the Pizza. Then you get respect.

To steal borrow a line from the joke stealer borrower The Fat Jew.

For John Schnatter it’s: First you make the pizza, then you get the money, and then you get the respect of running a $2.6 billion pizza company.

John Schnatter
(Papa) John Schnatter being carried respectfully

I like the pizza delivery business. It’s a simple product and process that everyone enjoys. And it dominates the home delivery market, for now.

Very little capital and space are needed to open a new store. Returns on invested capital are typically higher for pizza delivery stores than other restaurants

PZZA Return on Invested Capital (Annual) Chart

PZZA Return on Invested Capital (Annual) data by YCharts

And Papa John’s (PZZA) is returning excess capital back to shareholders through share buybacks, initiating a dividend, and increasing their dividend.

PZZA Dividend Chart

PZZA Dividend data by YCharts

But I’m not the only one who likes Papa John’s Pizza.

Papa John’s stock price has increased 169% over the last 5 years.

PZZA Chart

PZZA data by YCharts

A compound annual growth rate of 21.96%.

What price would I have to pay today to get another 20% annual returns over the next 5 years?

Why 20%?

Why not?

Let’s aim for above-average returns.

Also, I’m human and I need a margin for error. Hopefully, my error is paying a little too much. Instead of a 20% per year returns I still end up earning a return greater than 10% per year. The 20% provides a cushion if I misvalue the company.

Rough Valuation

This is just a rough estimate. An exercise to see how attractive Papa John’s stock is at today’s prices and/or what potential price makes the stock attractive.

Papa John’s generated $1.714 billion in revenues last fiscal year and EBITDA of $207.19 million. An EBITDA margin of 12.08%.

At the end of 2016, Papa John’s had 5,097 stores (owned and franchised) globally. That’s $40,649 EBITDA per store.

Papa John’s expects to add 1,571 more stores to its global footprint, both owned and franchised. Mostly franchised and in international markets.

6,668 stores in 5 years.

Let’s expect the average EBITDA and EBITDA margin per store to remain the same.

6,668 stores x $40,649 EBITDA/Store = $271.05 million EBITDA .

Using a EV/EBITDA multiple of 12 = $3.252 billion enterprise value. Papa John’s currently trades at a 14x EV/EBITDA multiple. Papa John’s 5-year average is 14 and its 10-year average is 10.

Papa John’s announced a new share repurchase plan and financing plans that will push leverage to 3-4x EBITDA within the next 12-18 months. Using the lesser 3x EBITDA, this will push Papa John’s debt up to $621 million. And I’ll assume no more debt is added over the next 5 years.

$3.252 billion enterprise value – $621 debt = $2.631 billion market cap.

Assuming Papa John’s continues reducing share count by 1.9 million per year. This leaves 27 million shares outstanding in 5 years. A reduction of 9.5 million shares. This is higher than the 7 million shares that could be purchased at today’s prices under the new $500 million share repurchase program.

In five years, assuming all targets are met, profitability and leverage remain the same, and with a favorable EV/EBITDA multiple, Papa John’s could fetch a share price of $97.

Buying Papa John’s today at $71 per share potentially produces 6.44% per year not counting its dividend.

It is a positive return but not an above average return.

Attractive Prices

But based on this rough valuation and a desire for 20% returns, Papa John’s is very attractive around $40 and below.

If we’re willing to accept less returns, like 15%, than Papa John’s looks attractive around$50.

Again, this is just a back of the napkin estimate. It is prone to error, both undervaluing or overvaluing.

South Sea Bubble & Initial Coin Offerings Similarities

The craze surrounding cryptocurrencies and initial coin offerings is an echo of the South Sea Bubble that hit England in the early 1700s.

South Sea Bubble

The South Sea Bubble wasn’t just a bubble related to trade involving the South Seas, the waters off South America. It was also a joint stock bubble

The South Sea Company was a joint stock offering to fix the finances of England. Ultimately, it was a scheme. No trade would reasonably take place but the company’s stock kept rising on promotion and the hope of investors.

The joint stock of the South Sea Company rose so much and captivated the attention of so many, that “enterprising” individuals looked to raise money by launching their own stock offerings.

It was an unregulated market and all manner of initial stock offerings were being floated.

  • For the improvement of London and Westminster.
  • For settling the island of Blanco and Sal Tartagus.
  • For the importation of Flanders Lace.
  • For purchasing land to build on.
  • For trading in hair.
  • For breeding horses.
  • For a perpetual motion machine.

And much more. Some plausible and others absurd.

But no person was more “enterprising” in their stock offering than the following man. From Charles McKay’s classic Extraordinary Popular Delusions and the Madness of Crowds

But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one, started by an unknown adventurer, entitled “company for carrying on an undertaking of great advantage, but nobody to know what it is.”

Next morning, at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2,000 pounds. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.

The demand or joint stock offerings grew so large that people threw caution to the side. They did not want to miss out on the next big winning joint stock offering and they would pay almost any price.

Cryptocurrencies & ICOs

Fast forward to today and the buzz around Cryptocurrencies.

The two leading names are Bitcoin and Ethereum. Both cryptocurrencies have seen their trading values skyrocket within the past year. And the rise has attracted a lot of individuals looking to invest in the next great thing.

It has also attracted “enterprising” people looking to raise capital through an initial coin offering (ICO).

An ICO typically involves selling a new digital currency at a discount — or a “token” — as part of a way for a company to raise money. If that cryptocurrency succeeds and appreciates in value — often based on speculation, just as stocks do in the public market — the investor has made a profit.

Unlike in the stock market, though, the token does “not confer any ownership rights in the tech company, or entitle the owner to any sort of cash flows like dividends,” explained Arthur Hayes of BitMEX, one bitcoin exchange.

An initial coin offering is unregulated means to bypass the traditional way of raising capital for a new venture.

Afraid of missing out on the next big thing, people are willing to hand their money over no matter how thin the premise.


Dentacoin is the first Blockchain concept designed for the Global Dental Industry. The Dentacoin ERC20 token is configured to be used globally by all individuals.

Dentacoin aims at improving dental care worldwide and making it affordable through utilizing the Blockchain advantages. We believe that empowering patients to become an active part in the industry development process is the key to shaping the future of dental care.


The coin issuer is asking for $100 million to make coupons for marketing services with its parent company, Gravity4.

Stox Tokens needs $30 million for what are essentially casino chips to use in a prediction market


Hubii seeks $50 million so writers, musicians, and filmmakers can cut out Netflix, Spotify, and YouTube and somehow still get paid.

Paragon Coin

Paragon requires $100 million for a farm-to-pipe cannabis supply-chain tracking and payments system.

And many others. Some more absurd than others.

How Does It End

The South Sea Bubble ended when the English government enacted laws to stop the excessive offerings.

The unregulated markets became regulated.

Most likely the same thing will happen to cryptocurrencies and ICOs.

When the cryptocurrency markets and the “me too” initial coin offerings become too big to ignore, governments will look to regulate them.

China already banned cryptocurrency exchanges.

ICOs are essentially unlicensed security offerings. The SEC and U.S. regulators don’t like that.

When the bubble bursts I don’t think the fist movers and the established players like Bitcoin and Ethereum will go away. Blockchain technology should find its way into everyday life.

Will all these “me too” offerings continue to exist after the bubble bursts?


Avoid the FOMO

Instagram Ad to day trade bitcoin.

If the fear of missing out on the cryptocurrency craze strikes you and you’re bombarded with all sorts of “get rich quick” cryptocurrency schemes remember this.

If you think you want to invest in an ICO remember you’re giving your money to a stranger on the internet who might be using a fake name, who probably isn’t building what they say they will, whom you can’t sue for fraud and is probably stealing your money to buy a Porsche.

What I Wish I Wrote ~ September 1, 2017

A collection of mostly finance related links that I wish I had the talent to create.

Why Everyone Should Write. Putting yourself out there increases optionality. (Collaborative Fund)

Shorting Uber (Jeff Matthews Is Not Making This Up)

McDonald’s (MCD) used to make the best fast food french fries in the world — until they changed their recipe in 1990. (Revisionist History)

5 Tips to Avoid Dividend Cuts (ValueWalk)

Big name consumer brands earn outsized economic returns in part because they lowered the consumer’s search costs. The internet is changing all this. (Intrinsic Investing)

Flywheel Effect: Why Positive Feedback Loops are a Meta-Competitive Advantage (Evergreen)

Tencent’s wide moat and it pays a dividend albeit a very small one. (Saber Capital Management)

Why The Auto Parts Retailers Will Slowly Go Extinct (The Drive)

Three Financial Red Flags to Avoid When Investing For Dividend Growth (Sure Dividend)

Importance of ROIC: “Reinvestment” vs “Legacy” Moats (Base Hit Investing)

Howard Marks’ Checklist

One of our core tenets at American Money Management is we can’t predict the future. We don’t know what the equity markets will do this year, next year, or the year after that.

No one can.

Capital markets are dynamic systems. There are too many participants involved and too many variables interacting and influencing each other to make accurate predictions about the future.

What we can do is take the temperature of the capital markets. To see where we stand along the risk spectrum. Are capital markets pro-risk, anti-risk, or somewhere in between?

This is the position of Howard Marks, Chairman of Oaktree Capital. I can’t remember in which one of his memos he put this in but Howard Marks created a checklist for gauging the capital markets’ appetite for risk. I recreated Howard Marks’ checklist below.

Market Risk Checklist

Download Howard Marks’ Checklist

I recently went through the checklist and I found myself checking all the boxes on the left side.

I view the market as being very pro-risk.

I tried to be objective as possible when filling out the checklist but I can’t escape my biases. I could have easily over estimated how much risk the market is taking. If you work with a team or a couple other people, I would recommend each person complete the checklist on their own and then compare each other’s answers.

Third Point Invests in BlackRock (BLK)

In their Q2 2017 letter, Third Point outlines their reasons for investing in BlackRock (BLK). BlackRock is a long time holding in our dividend growth portfolio.

BlackRock is the world’s largest asset manager, with $5.7 trillion in AUM. In a classic scale industry, BlackRock is an asset-gathering machine, with organic net inflows of over 7% annualized2. Coupled with a tailwind from rising markets, AUM grew 17% year-over-year in the second quarter, which remains a key input for earnings power. Yet we see BlackRock as far more than an asset manager dependent on market movements. It is increasingly becoming a network or index-like business, with earnings power driven by ETFs (via iShares) and data & analytic services (via Aladdin). These are oligopoly businesses with faster growth and much higher incremental margins than traditional asset management – and thus deserve much higher P/E multiples over time. With shares at less than 15x our 2019 EPS forecast, and an outlook for consistent mid-teens EPS growth, we think BlackRock is a misunderstood franchise that is just beginning to inflect.

BlackRock’s iShares business has over 38% global market share in ETFs, and rising. It took in a record $74 billion of net flows in 2Q – a 21% organic growth rate – and had nearly as many inflows in the first half of 2017 ($138 billion) as all of last year. In the US, iShares had more inflows in 1H17 than the next 10 competitors combined. We think this acceleration in ETFs is just getting started, as regulatory change globally pushes lower-cost, transparent investment products, and institutional investors use ETFs as investment solutions, particularly in fixed income – an area where BlackRock has an even higher global market share for ETF products (~50%). We see iShares delivering mid-teens topline growth over the next 3 years and producing over half of BlackRock’s earnings by 2019. More importantly, this is a business with significant operating leverage as it scales, with far less variable costs from compensation and benefits, which limit the margins of traditional asset managers.

BlackRock’s Aladdin business is a data, analytics, and risk management platform originally built for internal use that now services over 25,000 external users. Historically, Aladdin was focused on institutional investors and corporates but we see a huge opportunity to bring it directly to retail financial advisor networks. This new product, called Aladdin Risk for Wealth Management, will link the world’s biggest asset manager and ETF provider directly to the desktops of thousands of financial advisors and their customers. As with other data and analytics providers in which we have made investments, these services become sticky, must-have products for users, with upside from ancillary fees. We see Technology and Risk Management revenue, which became a new line-item on BlackRock’s P&L in 1Q17, continuing to grow at 12-15%, and delivering 20% of incremental operating income growth in 2019.

BlackRock is valued like a traditional asset manager but it has much greater potential for structural revenue growth and operating margin expansion. Previous headwinds like USD strength have now become tailwinds, helping recent performance, but we are much more excited that higher-margin, higher-multiple businesses like iShares and Aladdin will become almost 2/3 of BlackRock’s earnings power within 3 years. This evolution in business mix should deliver 20x+ forward P/E multiples for the stock as well as faster, more consistent mid-teens EPS growth – a combination which drives ~40% total return potential for shares over the next 2 years.

The full Q2 2017 letter from Third Point