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Not so Bad Looks Good Enough for Papa John's Stock

By Charley Blaine

Investing.com - On the surface, there's no reason Papa John's International (NASDAQ:PZZA), the third-largest pizza delivery company, should see its stock rising.

But the shares were up 4% Wednesday afternoon, a day after reporting a 20% decline in fourth-quarter revenue and adjusted earnings of 15 cents a share, down from 65 cents a year ago. The stock's performance was better than that of rivals Domino’s Pizza (NYSE:DPZ) and Yum! Brands (NYSE:YUM), owner of Pizza Hut.

The reason for the gain seems to be the guidance. The company expects 2019 to be not so bad, with comparable sales in North America falling 1% to 5% from 2018 and international comparable sales flat to up 3%, better than some analysts were hoping for.

Adjusted earnings for the year will be $1 to $1.20, the company projected. Adjusted earnings in 2018 were $1.34, according to the company's earnings report.

In the fourth quarter, adjusted earnings were 15 cents, compared with a forecast of 19 cents from analysts polled by Investing.com and down from 65 cents a year ago. Revenue of about $374 million also missed the Investing.com estimate of $393 million.

Still, the question is if the stock can go on any kind of sustained rally.

It has been parked in the lower $40s this year and is still off about a third from its 52-week high of $64.18. What will make 2019 better (especially in the second half of the year) will be strong promotional efforts throughout the year emphasizing ingredient quality, stronger internal systems and better relations with franchisees, who have struggled with intense competition from other pizza companies, CEO Steve Ritchie said in a conference call.

Ritchie took over as CEO from founder John Schattner last summer.

As important, it negotiated a $200 investment in February from Starboard Value LP, the activist investor, with an option for $50 million more. Starboard's Jeff Smith is now board chairman and, at least for now, the executive suite is stable.

Papa John's struggled for much of 2018 from the fallout after Schattner resigned after he used a racial slur on a conference call. The fallout damaged sales and the company looked to find a buyer. It gave up the effort when it deemed offers too low and, in February, found Starboard willing to invest.

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