Papa John's Downgraded By Pacific Crest Analysts: Here's Why

Courtesy of Benzinga.

• Papa John's Int'l, Inc. (NASDAQ: PZZA) shares have gained 31 percent year-to-date, and have surged 5 percent since October 1.
• Pacific Crest’s David Canson downgraded the rating on the company to Sector Weight.
• Given the rally in the company’s shares, there is unlikely to be further appreciation in the absence of significant EPS upside, Canson said.

Papa John's shares have appreciated 31 percent YTD, significantly outperforming the KBCM Restaurant Index, which is down 2.8 percent over the same period, and the S&P 500, which is up 1.5 percent.

Analyst David Canson mentioned that there is some EPS upside since “commodity prices remain favorable and international franchise development leverages fixed costs.”

The company is expected to have witnessed MSD commodity deflation in 3Q. Canson believes Papa John's is making progress reducing the operating loss in China.

“However, assuming 2016 EPS approximates $2.60 (8% higher than the $2.43 Street mean and a 25% increase from our 2015 estimate), the stock would still be trading at 28x P/E, or ~50% above its 10-year historical average valuation,” Canson wrote.

The rally in shares have caused the downgrade, which would be reconsidered in case there is a pullback, since “the long-term growth drives remain in place,” the analyst commented. Papa John's is expected to average annual EPS growth of 17-20 percent during the next five years, driven by:

1. The company gaining an additional 30-40 bps of market share from smaller competitors, which may result in MSD SRS gains over the next several years
2. Converting customers to digital users and Papa Rewards members, both of which would drive greater frequency
3. The international segment becoming a more significant contributor to profits, probably boosted by consolidated operating margin by 30-40 bps annually for the foreseeable future

Posted-In: David Canson Pacific Crest VetrAnalyst Color Downgrades Analyst Ratings