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.