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Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
Strategic Valuation of Pizza Market leaders
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Strategic Valuation of Pizza Market leaders

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A comprehensive strategic valuation presentation of Domino's verse Papa John's Pizza companies. Methods include DCF, Relative valuation, regression analysis.

A comprehensive strategic valuation presentation of Domino's verse Papa John's Pizza companies. Methods include DCF, Relative valuation, regression analysis.

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  • Opening and Introductions: Alex
  • Alex:
  • The world restaurant industry generated nearly $1.6 trillion in revenue in 2010. Market growth is expected to slow to 3% yearly until 2015 to ending at $1.8 trillion. The global foodservice sector continues to feel the pressures of the economic recession, unstable food and energy prices, a fragile housing sector, and depleted consumer confidence. The world market continues to evolve with preferences moving towards health consciousness.
  • Growth : Sales are expected to reach $632 billion in 2012, which is a 3.5% increase over Last. Challenges : US Recession effecting people’s ability to dine out. Also, increasing commodity prices. Trends : Healthier choices, smaller portion sizes; locally grown produce, local meats and seafood, and the use of innovative technology, such as Facebook and Twitter, and the phone apps.
  • Seems to show a slight correlation between the cost of commodity prices (such as wheat, cheese and meat) and the stock prices of PJ and Dominos. NEED SOURCE for data.
  • Informal dining is broken up into 3 main categories: Quick Service, Casual Dining, and Fast Casual. Dominos and Papa Johns falls under the QSR category. This category makes up 32.2% of the entire informal dining segment.
  • Pizza revenues are about 19% the total revenues under the QSR segment, and 6% of overall informal dining segment. The (QSR) pizza category is comprised of delivery, dine-in and carry-out services. It is the second largest category within the $238.9 billion U.S. QSR sector at about $45.6 Bil last year.
  • The big 4 are Pizza Hut, Domino’s, Papa John’s and Little Caesars, which make up 34% of the Pizza industry. This is higher than the combined “other top chains” and slightly lower than the overall independents. Barriers to entry in the pizza franchise industry are high. Mostly franchised, Domino’s has a vertically integrated supply chain and most pizza industry leaders have achieved economies of scale. However, barriers for independents are quite low.
  • From 2009 to 2010, Pizza Hut revenues grew 7.8%; Domino’s 9.1%, Papa John’s 1.9% and Little Caesars 10.4%.
  • History: Domino’s is credited with pioneering the pizza delivery industry since they began delivering pizzas more than 50 years ago. Ownership: 90% held by institutional and mutual fund owner, and 96% of float shares held by institutional and mutual fund owners. Strategies: big on technologies, such as pizza tracker, fb and twitter, and phone app for ordering. Supply chain is fully integrated to create competitive pricing advantage. Growth: Dominos is growing, but it is mostly international stores, with 400 stores last year and another 400 this year, Dominos Int’l will exceed total domestic stores . Marketing: Innovative with marketing techniques. You may have seen their Oh Yes We Did campaign where they displayed customer feedback on an electronic board in times square. It’s working. They have also been involved in a healthy school lunch program called smart slice. Slip up:
  • Cost of Sales: Operating Margin: G&A: Operating Lease Capitalization: Mostly supply chain building leases, vehicles and machinery, and some capex for company-owned stores.
  • ASSUMPTIONS: Revenue growth is approx. 3% in the first year, then declines by a 1/3 in subsequent years. DA is 1.8% of revenue plus the depreciation for capitalized leases, $7M+ CAPEX: Purchase of Fixed Assets, intangibles, and software development NWC: excludes restricted cash; majority of cash used to service debt and repurchase common stock
  • Discount Rate: Used regression calculated beta, which was higher than Domino’s asset beta, since domino’s is highly leveraged we felt it need to reflect the volatility. Growth rate: the company seems to be growing with the economy, and saw no reason to adjust growth up or down, so we went with 2.5% Valuation: Considering the DCF model, Domino’s is undervalued by about 31%
  • Weighted comparables based on Total Sales/most related to the pizza industry, such as Papa John’s Forward P/E is based on forecasted earnings and shows a comparables shows this value higher than DPZ actual PE F of 15.39 P/E valuation is slightly higher And PSR is almost double P/E and DCF are very similar w/ a $700M difference
  • (Chris) Opened in 1984 by John Schnatter, out of the back closet of his father’s tavern Growth Through Quality – 2011 Annual Report Title Better Ingredients. Better Pizza – Tagline QC Centers – (PJFS) Papa John’s Food Service Centers Growth – 40 new international stores in next 3 years, recent acquisition of net 50 franchise restaurants in Denver/Minneapolis Evolving with technology – Reactive or innovative?
  • (Chris) Ownership % of Shares Held by All Insider and 5% Owners: 24% % of Shares Held by Institutional & Mutual Fund Owners: 73% % of Float Held by Institutional & Mutual Fund Owners: 96% Number of Institutions Holding Shares: 144 Governance – ISS narrative off of yahoo finance 3 committees – independent of the company Audit Compensation Corporate Governance Stock History 3 for 2 split in 1996 $.2222 stock rights (2000) $1.00 stock dividend (2005)
  • (Chris) Started with average revenue growth over last 5 years (4.09%).Subtracting out worst year, revenue growth was over 6%. Reluctant to go below 4.09, but did. Reduced revenue growth annually by .5% Operating leases related to restaurant facilities and supply trucks. Took the necessary steps to capitalize those leases, and adjust the financial statements.
  • John: Used published beta: as regression beta was much lower. Used the Equity Risk premium of 5% suggested in class Used the market risk free rate of 2.5% also suggested in class
  • Used trial and error iterative process to recognize an implied discount rate of 9.35% to obtain a value similar to the published market cap value of Papa John’s Reason for possible analyst higher discount rate Stability of economy –still too many mixed signals Interesting risk factors in Papa John’s annual report Market mature and highly competitive Little Ceasers/Independents would steal market share Changes in consumer preferences (healthy/local), and discretionary spending Ingredient cost volatility Dependence on sole/limited suppliers Gas prices International expansion – war/terrorism
  • Used same comparable and weights as Dominos relative valuation. Substituting Domino’s data in for Papa John. Heavily weighted toward Dominos McDonald’s weight low as it has much higher sales and is not within the pizza segment Forward PE Valuation is closest to market valuation – not surprisingly
  • Domino’s DCF and PSR shows that it is undervalued, but we are somewhat skeptical of this result. We are skeptical based on the slow growth in the economy and risks associated with positive, growing net income (like commodity price increases). Additionally, Domino’s recent earnings report shows that it missed its first quarter revenue goals by 24%. Subsequently, the stock price dropped almost 10% yesterday. Domino’s is highly leveraged, which makes the company risky investment. We would hold on Domino’s stock purchase. Papa John’s DCF and P/E show that PJ’s is undervalued. We can only assume that analysts believe that the growth rate should be lower and/or the discount rate should higher according to these figures as the the forward PE is pretty close to the current market capitalization figure. Overall, according to our valuations, Papa John’s is the one to buy! Our full recommendation is a slight buy on PJ and hold on Dominos.
  • Transcript

    • 1. Domino’s and Papa John’sStrategic Valuation Analysis VS
    • 2. Agenda• Restaurant Industry Overview• Domino’s Company Overview• Papa John’s Company Overview• Domino’s Analysis• Papa John’s Analysis• Conclusion
    • 3. Global Restaurant Statistics• $1.6 trillion in revenue in 2010 – Cafes & Restaurants account for 36% ($571 b)• Marked growth is expected to slow to 3% yearly by 2015 – $1.8 trillion by the close of 2015• Trends & Challenges – Unstable food and energy prices – Fragile housing sector – Depleted consumer confidence• Health-conscience Consumers (http://www.reportlinker.com/ci02054/Restaurant-and-Food-Services.html)
    • 4. Restaurant Industry Overview• Growth• Challenges• Trends
    • 5. Commodity Price Index
    • 6. Informal Dining Segments
    • 7. QSR Segments Source: Restaurant State of the Industry Report Part 1: Food and Beverage © 2011 NetWorld Alliance LLC
    • 8. Pizza Competitors Source: PMQ Pizza Magazine September 2011
    • 9. Pizzeria Rankings Source: PMQ Pizza Magazine September 2011
    • 10. Domino’s Pizza Overview• History• Ownership• Strategies – Technology and Innovation – Supply Chain – Growth – Healthy Pizza in Schools • Domestic v. International – Marketing • “Oh Yes We Did!”
    • 11. Domino’s Pizza Analysis 12 Months Ended Common Size(In $Millions) FY 2009 FY 2010 FY 2011 FY 2009 FY 2010 FY 2011TOTAL NET REVENUES 1,404,057 1,570,894 1,652,193 100% 100% 100%TOTAL COST OF SALES 992,981 1,132,305 1,181,677 70.7% 72.1% 71.5%OPERATING MARGIN 386,976 438,589 470,516 27.6% 27.9% 39.8%DEPRECIATION 24,100 24,100 24,000 1.7% 1.5% 2.0%GENERAL AND ADMINISTRATIVE 197,467 210,887 211,371 14.1% 13.4% 17.9%INCOME FROM OPERATIONS 189,509 227,702 259,145 13.5% 14.5% 21.9%INTEREST INCOME 683 244 296 0.05% 0.02% 0.0%INTEREST EXPENSE (110,945) (96,810) (91,635) 7.6% 6.7% 6.3%INC. B/F PROV. FOR INCOME TAXES 135,522 138,945 167,806 9.7% 8.8% 10.2%PROVISION FOR INCOME TAXES 55,778 51,028 62,445 41.2% 36.7% 37.2%NET INCOME 79,744 87,917 105,361 5.7% 5.6% 6.4%
    • 12. Domino’s Pizza Analysis 2012 2013 2014 2015 2016Operating Profit 296,975 302,769 306,709 309,370 311,160Taxes 114,038 116,263 117,776 118,798 119,486NOPAT 182,937 186,506 188,933 190,572 191,675Plus: Depreciation 37,920 38,533 38,949 39,231 39,420Less: Capex (25,566) (26,845) (28,187) (29,596) (31,076)Less: Change in NWC 521 (749) (509) (344) (231) Firm FCF: 195,811 197,445 199,185 199,862 199,787 AssumptionsRevenue Growth: 5-year Forecast PeriodCS: 72.0%G&A: 12.8%Taxes: 38.4%Int. expense: 7.0%Op. NWC 2.20%Capex: 5%DA: 1.80%
    • 13. Domino’s Pizza Analysis Terminal Value: 4,785,614PV FCF 183,380 173,170 163,606 153,740 143,925 PV(Terminal Value): 3,447,515Total PV(FCFF + TV) 4,265,335Less Current Debt 1,450,369Estimated Equity Value 2,814,966 2,180,000 (as of 4/29/12)Value per share 48.73 37.14 (as of 4/29/12)Appreciation in price 31.2%Discount Rate (WACC) 6.78%Long-term growth rate 2.50%
    • 14. Domino’s AnalysisComparable Companies In $ Millions (except ratios) Forward PE PE Price Revenue Market Shares NetAs of April 27, 4:00PM Ratio Ratio PSR /Share / Share Value O/S Income Sales WeightQSR Pizza SegmentPizza Hut (YUM) 23.19 19.24 2.59 73.32 28.13 33,730 460.00 1,510 12,940 20%Papa Johns (PZZA) 18.26 14.55 0.80 40.17 50.33 974 24.24 56 1,220 50%QSR SegmentMcDonalds (MCD) 18.20 15.49 3.56 97.43 26.90 99,240 1,020.00 5,560 27,440 10%Starbucks (SBUX) 34.39 24.75 3.75 57.43 16.18 43,270 753.40 1,280 12,190 10%Tim Hortons (THI) 24.28 18.78 3.07 57.85 18.39 9,090 157.14 388 2,890 10% 21.46 17.03 1.96 56.02 36.94 22,393 297.17 1,053 7,450 100% Value Value PPS Diff.Forward PE Valuation 1,793.75 31.05 -17.7%PE Valuation 2,260.50 39.13 3.7%PSR Valuation 3,227.40 55.87 48.0%Dominos Value 2,180.00 37.74
    • 15. Papa John’s Pizza Overview• History• Growth• Market Share – 6%• Strategies – Growth Through Quality – Better Ingredients. Better Pizza – International Expansion – Supply Chain – QC Centers – An App for ordering
    • 16. Papa John’s Pizza Overview• Ownership – Insiders/Owners: 24% – Institutions – Mutual Funds http://financehttp://finance.yahoo.com/q/pr?s= PZZA+Profile• Governance .f – Founder, CEO and Chairman – 3 Charter Committees• Stock History – June 1993 IPO (PZZA) - $4 – Today: creeping over $40
    • 17. Papa John’s Pizza Analysis Pro-Forma Income Statement 2012 - 2015 2011 Common Size 2012 2013 2014 2015• Assumptions Total revenues Cost of sales 1,217,882 126,887 100.00% 1,267,693 10.04% 127,229 1,313,204 1,353,782 1,388,844 131,797 135,869 139,388 Salaries and benefits – Revenue growth 142,093 12.21% 154,840 160,398 165,355 169,637 Advertising and related costs 49,035 4.11% 52,165 54,038 55,708 57,151 Occupancy costs 32,278 2.77% 35,167 36,430 37,556 38,528 • 4.09% to 2.59% Other domestic Company-owned restaurant Total operating expenses expenses 75,558 425,851 6.34% 35.48% 80,413 449,814 83,300 465,963 85,874 480,361 88,098 492,802 – Tax Rate: 32% Cost of sales 426,955 34.16% 433,103 448,651 462,515 474,494 Salaries and benefits 35,141 2.98% 37,745 39,100 40,308 41,352 Other operating expenses 53,188 4.24% 53,761 55,691 57,412 58,899 – Operating Leases Total domestic commissary and other expenses International operating expenses 515,284 35,674 41.38% 2.70% 524,609 34,228 543,442 35,457 560,235 36,553 574,745 37,499 General and administrative expenses 111,608 9.58% 121,388 125,746 129,632 132,989 • Capitalize Other general expenses Depreciation and amortization 9,767 32,681 0.91% 2.79% 11,504 35,343 11,917 36,611 12,286 37,743 12,604 38,720 Total costs and expenses 1,130,865 92.35% 1,170,735 1,212,764 1,250,238 1,282,620 Operating income 87,017 7.65% 96,959 100,440 103,543 106,225 Investment income 755 0.07% 836 866 893 916 Interest expense -4,668 -0.31% (7,082) (6,512) (5,928) (5,592) Income before income taxes 86,275 7.41% 93,885 97,255 100,260 102,857 Income tax expense 26,888 30,043 31,122 32,083 32,914 Net income, including noncontrolling interests 59,387 63,842 66,134 68,177 69,943 Less: income attributable to noncontrolling interests -3,732 -0.32% (4,002) (4,146) (4,274) (4,384) Net income, net of noncontrolling interests $55,655 4.73% 60,008 62,162 64,083 65,743
    • 18. Papa John’s Pizza Analysis• Discount Rate (WACC): 6.05% (calculated) – Terminal Growth Rate: 2.5% – Risk Free Rate: 2.5% – Equity Risk Premium: 5% 2012 2013 2014 2015 Terminal value Net income, net of noncontrolling interests 49,100 51,731 54,129 56,086 Plus: Depriciation and Amortization $47,965 $49,233 $50,365 $51,342 Operating Net Working Capital $23,716 $23,875 $24,035 $24,196 Less: Increase in Net Working Capital 10,059 159 160 161 Less: Capex 31,358 29,321 27,415 25,634 Projected FCFF $55,647.56 $71,485 $76,919 $81,634 $2,359,623 Present value of FCFF 52,475 63,566 64,498 64,549 1,865,794 Total present value of FCFF 2,110,882
    • 19. Papa John’s Pizza Analysis• Discount Rate: 9.35% (implied) – Terminal Growth Rate: 2.5% – Risk Free Rate: 2.5% – Equity Risk Premium: 5% 2012 2013 2014 2015 Terminal value Net income, net of noncontrolling interests 49,100 51,731 54,129 56,086 Plus: Depriciation and Amortization $47,965 $49,233 $50,365 $51,342 Operating Net working Capital $23,716 $23,875 $24,035 $24,196 Less: Increase in Net operating capital 10,059 159 160 161 Less: Capex 31,358 29,321 27,415 25,634 Projected FCFF $55,647.56 $71,485 $76,919 $81,634 $1,219,749 Present value of FCFF 50,885 59,772 58,811 57,074 852,779 Total present value of FCFF 1,079,320
    • 20. Papa John’s Analysis, Cont.• Relative Valuation In Millions (except ratios) Forward PE Price Revenue / Market Shares Net Comparable Companies PE Ratio Ratio PSR /Share Share Value O/S Income Sales Weight QSR Pizza Segment Pizza Hut (Yum! Brands) 23.19 19.24 2.59 73.32 28.130435 33730 460 1510 12940 20% Papa Johns 18.26 14.55 0.8 40.17 50.330033 973.8 24.24 55.65 1220 Dominos 21.72 16.65 1.28 37.14 28.561537 2150 57.77 105.36 1650 50% QSR Segment McDonalds 18.2 15.49 3.56 97.43 26.901961 99240 1020 5560 27440 10% Starbucks 34.39 24.75 3.75 57.43 16.179984 43270 753.4 1280 12190 10% Tim Hortons 24.28 18.78 3.07 57.85 18.391243 9090 157.14 388.26 2890 10% 23.185 18.075 2.196 54.505 26.054174 22981 313.939 1077.506 7665 100% Value Value PPS Difference Forward PE Valuation $1,005.87 $41.50 9.50% PE Valuation $1,290.25 $53.23 40.45% PSR Valuation $2,679.12 $110.52 191.64% Papa Johns Valuation $918,640 $37.90
    • 21. Conclusion Value ValueDominos Valuation Summary Value PPS Diff. Papa Johns Valuation Summary Value PPS Diff.DCF 2,875 49.77 31.89% DCF 1,950 80.46 112.30%Forward PE 1,794 31.05 -17.7% Forward PE 1,006 41.50 9.50%PE 2,260 39.13 3.7% PE 1,290 53.23 40.45%PSR 3,227 55.87 48.0% PSR 2,679 110.52 191.64%Dominos Today 2,180 37.74 Papa JohnsToday 919 37.90
    • 22. Discussion
    • 23. Pizza Facts• $30 billion industry• 350 slices per second consumed in US• 61,269 pizza parlors in US• 3-11 year old favorite food for lunch or dinner• Average American eats 46 slices; – 23 pounds of pizza annually – 3 billion pizzas per year overall• Americans consume 251,770,000 pounds of pepperonis per year• Most popular “ethnic” food in America – Source: http://library.thinkquest.org/J0112790/facts.html

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