Despite Its High P/E Ratio, Is Papa John’s International, Inc. (NASDAQ:PZZA) Still Undervalued?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Papa John’s International, Inc.’s (NASDAQ:PZZA) P/E ratio to inform your assessment of the investment opportunity. Papa John’s International has a price to earnings ratio of 33.45, based on the last twelve months. That means that at current prices, buyers pay $33.45 for every $1 in trailing yearly profits.
View our latest analysis for Papa John’s International
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Papa John’s International:
P/E of 33.45 = $44.52 ÷ $1.33 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Papa John’s International shrunk earnings per share by 55% over the last year. But it has grown its earnings per share by 11% per year over the last five years.
How Does Papa John’s International’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Papa John’s International has a higher P/E than the average company (16.7) in the hospitality industry.
Papa John’s International’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Papa John’s International’s Balance Sheet
Net debt totals 40% of Papa John’s International’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Verdict On Papa John’s International’s P/E Ratio
Papa John’s International trades on a P/E ratio of 33.4, which is above the US market average of 17.1. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
Of course you might be able to find a better stock than Papa John’s International. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
