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Domino's and Papa John's: To stay hot, these stocks need more dough

Signage at a Domino's pizza restaurant is pictured in Burbank, California October 16, 2012. REUTERS/Fred Prouser

For Domino's (DPZ) and Papa John's (PZZA), two of the nation's largest pizza chains, the mammoth multiyear rallies in their stocks mean neither has any margin for error. On Tuesday, they'll both get the opportunity to tell Wall Street that they're still getting it right -- or be left to explain why they didn't.

Quite simply, both have been stellar, delivering staggering profits to investors who've held onto the shares. Operationally, they've also been sound, helped along by getting customers to believe that, as chains go, they're top-tier, as well as by building ordering technology that meshes with our smartphone-centered lives.

How strong have these two been as investments? Papa John's closed 2008 at $9.21. It ended 2014 at $55.80, for a compound annual growth rate of 35%. So far this year, it's up another 17.4%, trading at all-time highs past $65. Domino's has been even more impressive. It ended 2008 at $4.71 and last year at $94.17, for a compound annual growth rate of almost 65%. So far in 2015, it's up 10.9%, also now at record highs of $104 -- and above analysts' consensus price goal.

Since the market rally began in 2009, all manner of stocks have ascended, whether good operators or perhaps not as good. Restaurants are no different, having been on the whole tremendous during the five-plus year run for shares. Betting against the industry (and stocks in general) has been only for the brave, but it's also meant so many equities are, in the often-repeated phrasing, priced for perfection.

It's difficult to argue the "perfection" part doesn't apply here, as well. For Papa John's, many valuation metrics are at the highest levels they've been at any point in the last five years, including trailing and forward price-to-earnings ratios at 39.3 and 30.3, respectively. The situation's the same with Domino's, which is valued now as richly as it has been in the past half decade.

This isn't to diminish what the businesses have done -- each has seen net income grow at a double-digit rate for several years. In the last seven quarters, Papa John's same-store sales have averaged an increase of 7.3%, while at Domino's, the comparable-store sales gain has averaged 4.6%.

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With ads talking up better or improved sauces, matched with menus displaying artisanal and specialty pizzas, customers are buying it from both brands. The sales and the earnings say so.

For the most recent quarter, analysts are estimating earnings of 50 cents a share, sales of $411.7 million and a same-store sales climb of 1.4% at Papa John's. With Domino's, they're planning for a profit of 93 cents, sales of $616.2 million and comparable sales that are up 6.7%.

These names have been persisting, and adapting, in the $38 billion U.S. pizza segment, home to more than 70,000 stores. That segment has, like others in the restaurant group, been impacted by the fast-casual influences of unusual recipes and higher-quality ingredients, leading to the growth of "craft" pizza sellers such as Rave Restaurant Group's (RAVE) Pie Five and prompting investments in these concepts by Chipotle (CMG) and Buffalo Wild Wings (BWLD). For Domino's and Papa John's, convincing the pizza eater they're not just bland, everyday pepperoni sellers has been working.

Now Pizza Hut, the world's No. 1 pizza purveyor, is trying to do the same. Last November, the Yum Brands (YUM) division remade its menu to add a host of new specialty pizzas, ingredients and sauces, updated its website and changed its logo. (Domino's and Papa John's are the largest publicly traded pizza sellers measured by store totals, though Pizza Hut would be if it traded on its own.)

That was done because Pizza Hut, despite its scale, was in need of a boost. U.S. sales in 2013 were flat with the prior year, and per-store revenue declined. It's been a slower-than-anticipated start, with the company saying earlier this month that "the initial relaunch of the Pizza Hut brand in the U.S. did not deliver the sales lift we expected." However, it is early, and as Domino's and Papa John's have shown, big-store pizza hasn't fallen out of favor.

Now all they have to do is keep showing that's true, again and again. The market rewards today's wins and, even more, tomorrow's promise. It won't dwell on the past, no matter how great it might be.

If any the estimates prove to be too optimistic, it's likely trouble for these high-flying stocks. But either way, these two may be only for the bold: Either those optimists who aren't afraid to buy high or those contrarians who aren't afraid to go against the trend.