MKM Downgrades Papa John's, Stifel Turns Stays Bullish

Papa John's Int'l, Inc. PZZA reported encouraging third-quarter results and a management reshuffle.

The Analysts

MKM analyst Brett Levy downgraded Papa John's from Buy to Neutral with a price target lowered from $60 to $55.

Stifel analyst Chris O'Cull maintains at Buy, price target lifted from $60 to $66.

MKM: Hard Work Ahead

Papa John's earnings is highlighted by the company's first positive domestic same-store sales performance in two years which signals a potential turnaround could be seen, Levy said. However, the stock's more than 40% appreciation since the end of August warrants a step to the sidelines.

Nevertheless, management deserves credit for showing signs of improvement in just a few months and a downgrade from a bullish stance could prove to be wrong if three scenarios play out, including:

1. Momentum from the third quarter continues with the help of new initiatives and easy comparisons.
2. A new marketing campaign could "be enough to bridge results" until longer-term menu innovation options are introduced.
3. Investors start valuing the stock on 2021 performance instead of the "past disruptive and incented" era of 2018 to 2020.

"We believe if investors believe in both the pace and magnitude of the recovery (and greater evidence of results materializes) addition multiple expansion is possible, but at current levels we are taking a pause in our Buy rating," the analyst wrote in a note.

Stifel: CEO Showing Enthusiasm Over Value

Papa John's CEO Rob Lynch encouragingly detailed some strategic priorities during the post earnings conference call, O'Cull said. In fact, a common theme throughout the call was innovation, which "came up repeatedly and prominently." This marks a departure from prior leadership teams which didn't focus on innovation as under Lynch's watch a new Garlic Parmesan Crust pizza was conceived and launched in less than two months.

Lynch spoke enthusiastically about product innovation instead of emphasizing value along with opportunities for franchisees to lower their costs and remove some complexity out of their businesses.

"The company is proving there are no sacred cows and it will quickly respond to compelling ideas," the analyst wrote in a note.

O'Cull expects sales to improve by a mid-single digit rate in 2020 along with better franchisee profit which eases royalty relief and advertising contributions exiting 2020.

Price Action

Shares of Papa John's hit a new 52-week high of $62.58 Thursday afternoon.

Related Links:

Analysts Bullish On Papa John's CEO Change

MKM Bullish On Papa John's: 'Return To Basics'