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Papa John’s Stock Is a Buy in the Wake of the Shaq Deal

Jonathan Berr

Though I tried to avoid basketball metaphors in writing this post, it’s hard not to consider Papa John’s (NYSE:PZZA) decision to partner with NBA legend Shaquille O’Neal to be anything but a slam dunk for holders of PZZA stock.

PZZA Stock: Papa John's Stock Is a Buy in the Wake of the Shaq Deal

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O;Neal has agreed to invest in nine Papa John’s locations in Atlanta, join the board of directors and serve as a brand ambassador. Not only is the 47-year-old one of the most well-liked sports celebrities, but he also has a background in the franchise restaurant business. At one time, O’Neal owned 27 Five Guys Burgers and Fries locations. He also has a Krispy Kreme (NYSE:KKD)  franchise in Atlanta, and Big Chicken, a fast-casual fried chicken restaurant in Las Vegas, along with a fine dining establishment in Los Angeles called Shaquille’s.

“Everyone loves pizza and pizza loves everyone,” O’Neal, who approached the company about becoming a franchisee, told CNBC Friday. “We want to get this thing back on track.”

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PZZA Stock Shares Are Rising

Shares of Louisville-based Papa John’s, which have jumped 19% since the start of the year, rose nearly 5% to $49.12. Though the average 52-week target of Wall Street analysts is $50, near where it currently trades, PZZA stock has got plenty of room to run.

Activist investor Starboard Value is breathing new life into a brand that had grown staler than day-old pizza crust with its $200 million investment in PZZA, whose shares have jumped nearly 20 percent since the start of the year.  Six new board members including O’Neal have been appointed in 2019, so more changes are in the works.

Papa John’s Pizza Is Tasty

Starboard Chairman Jeffrey Smith, who also is PZZA’s chairman, has noted that the quality of Papa Johns pizza isn’t an issue. One of the reasons why Starboard’s 2014 proxy fight at Darden Restaurants (NYSE:DRI) succeeded was that the food at DRI’s flagship Olive Garden chain was awful.

Unfortunately, much of Papa John’s problems are self-inflicted. Founder John Schnatter lost his job as CEO a few years ago when he blamed protests by NFL players for falling pizza sales. Schnatter’s use of the “N-word” during a conference call that lead to his ouster as company chairman was inexcusable. Though Schnatter claimed his comments were taken out of context, the board deserves credit for not tolerating Schnatter’s behavior.

Schnatter, PZZA stock’s largest holder, reportedly failed to line up a private equity buyer to take the company private. He also offered an alternative to Starboard Value’s financial lifeline which the board rejected. PZZA and Schnatter, though, recently settled a lawsuit Schnatter filed after his ouster as chairman. Schnatter also left the board of directors, ending a massive distraction for the company, and has voiced support for the new management team.

Fixing a Damaged Brand

The company founder damaged the Papa John’s brand, hurting both PZZA shareholders and franchisees. PZZA has reported five straight quarters of negative North American comparable sales, an eternity for a restaurant chain or a retailer. The closely watched metric is expected to fall between 1% and 5% in 2019. That would be an improvement over the 7.3% decline Papa John’s reported last year.

Though turning it around won’t be easy or cheap, it appears to be doable, especially for the new management team which has done it before with an even more screwed-up company. Wall Street analysts are skeptical that it can be done, which makes the shares enticing.

PZZA stock currently trades at a steep valuation of more than 30 times next year’s earnings, a premium to rival Domino’s (NYSE:DPZ), which has a value of about 22, so wait for a pullback before pulling the trigger on Papa John’s.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

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