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In a shaky economy, one of the niche businesses that tends to do well is pizza. When consumers are worried about the economy, they often scale down their spending habits. That includes spending on eating out, and consumers frequently will order pizza at home instead of going out for dinner.
Papa John’s International (NASDAQ: PZZA) proved as much when it released fourth-quarter earnings on Tuesday. The company beat analyst expectations on profit, and the stock closed 2.5% higher for the day.
Papa John’s Earnings by the Slice
The Papa John’s earnings report said the company generated $0.62 per share in profit for the quarter, on $416.8 million of revenue. Revenue came in slightly short of projections, as analysts had expected $422 million. But earnings came in five cents above estimates.
For the full year, Papa John’s reported net profit of $75.4 million, or $1.89 per share. Revenue came in at $1.64 billion for 2015. On a year-over-year perspective, 2015 amounted to a solid year of growth for the company. Papa John’s earnings per share grew 19% in the fourth quarter and the full year, while total sales increased 5.3% in 2015.
And, sales would have been even better if not for unfavorable currency translations. The strengthening U.S. dollar took a bite out of internationally generated revenue last year, which artificially suppressed growth rates. Excluding the effects of foreign exchange, Papa John’s total global restaurant sales growth would have been 7.8% for the full year.
Papa John’s earnings growth rates were excellent due to strong sales at restaurants open at least one yet. This is measured by comparable-store sales, a key metric for retailers and restaurants. Papa John’s comparable sales grew 4.2% in North America and 5.3% in the international markets last year.
In addition, Papa John’s earnings were boosted by lower commodity costs. Most investors know that commodities like oil and precious metals have crashed over the past two years, but agricultural commodities like food have fallen significantly as well. In fact, Papa John’s reported that its average price of cheese per pound fell from $2.12 per pound in 2014 to $1.61 per pound last year.
Aggressive Expansion Pays Off
Based on the success of its existing stores, the company is aggressively expanding into new markets. This makes a great deal of sense, as Papa John’s experienced above-average growth internationally. In response, the company opened 230 net new restaurants worldwide last year, 182 of which were in the international markets.
Longer term, the company has a sizable restaurant development pipeline. In all, Papa John’s expects to open 1,140 restaurants, of which 200 units will be in North America and 940 units will be in international locations.
Thanks to continued sales growth and opening new restaurants, Papa John’s expects another good year in store. It forecasts full-year earnings to be $2.30 to $2.40 per share. At the midpoint of its earnings guidance, the company expects to grow earnings by another 24% in 2016.
Papa John’s earnings are also going to be boosted by its stock buyback program. The company generates enough free cash flow to reward its shareholders with both stock buybacks and a 1.3% dividend yield. Earlier this month Papa John’s approved a $75 million increase to its share repurchase program. Approximately $167.1 million remains available under the company’s share repurchase program, which amounts to roughly 8% of the company’s market capitalization.
Premium Valuation
Papa John’s isn’t a cheap stock at current levels. Shares trade for approximately 30 times trailing earnings per share and 23 times forward EPS estimates. On both metrics, the valuation multiples exceed the S&P 500 averages by wide margins.
But premium companies command premium valuations. Papa John’s is generating comparable sales growth well above its fast food peer group. Because of that, the stock may continue to reward investors.
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