Papa John’s Shows Signs of Breaking Out

Earnings, Investing Strategies, Options

Papa John’s (PZZA) is up 33% in 2020 overall, but still down 18% from its early September all-time high of $102.25. Following a recent consolidation period between $80-$82.50, shares are showing signs of breaking out and could be setting up for a return to the high $90s over the next few months.

In early November, Papa John’s reported solid third-quarter earnings after topping Wall Street’s estimates for the second consecutive quarter. The company reported a profit of $0.35 per share on revenue just south of $473 million; forecasts were for a profit of $0.32 per share on revenues of $466 million.

Comparable third quarter sales increased 23.8% in North America and 20.7% internationally,attributable to the company’s renewed focus on its strategic priorities; its commitment to an innovation mindset; and its dedication to supporting team members and franchisees, according to its CEO Rob Lynch.

Moreover, Lynch believes double-digit comparable sales growth, dramatically higher earnings, and robust free cash flow all reflect a winning strategy and execution that helped the company outperform its competition and deliver five straight quarters of same-store sales growth.

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Following the release of these results, Papa John’s board of directors approved a new share repurchase program for up to $75 million of the company’s common stock, effective through December 31, 2021. The new share repurchase program demonstrates Papa John’s commitment to value creation in both the near and long term, as well as the company’s confidence in its future.

Shares trended higher following the initial news, closing at $83.52 but then retreating to a low of $76.50 the following session. Two analysts out of 15 who follow the company lowered their price targets and ratings on the stock afterwards, which may have contributed to the pullback.

Choppy trading followed throughout November before the recent breakout to $87.39, with prior resistance from mid-September holding. On a technical setup, if shares can clear and hold the $87.50 level, a possible run towards the low- to mid-$90s could occur into 2021.

Papa John’s is making big investments in its capabilities, including its technology platform. Lynch expects technology to be a bigger part of the business model going forward, as 70% of the company’s orders come through e-commerce. The CEO added pizza is pandemic-proof, noting that the more people stay at home, the more they need the company. He might be right.

Another Wall Street analyst recently said he believes the combined impact of new dine-in restrictions in some states and higher case counts nationwide is driving a renewed acceleration in the pizza category that he does not yet see reflected in current consensus expectations for the upcoming quarter.

To take advantage on a move above the $87.50 level, aggressive traders can target the PZZA January 90-calls, which are currently trading at $2. If shares make a run at $94 on a move above $87.50 this month, these options would be $4 in-the-money, double from current levels; if shares fall below the $80 level, traders can exit the position to save the remaining premium.

Conservative traders can sell the aforementioned call option to lower the overall cost basis in the stock, while collecting a 22.5-cent quarterly dividend. The 50-day moving average is showing signs of leveling out after a two-month decline, which is typically a bullish signal shares have stabilized.

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