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.
Strategic Valuation of Pizza Market leaders
Domino’s and Papa John’sStrategic Valuation Analysis VS
Agenda• Restaurant Industry Overview• Domino’s Company Overview• Papa John’s Company Overview• Domino’s Analysis• Papa John’s Analysis• Conclusion
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)
Restaurant Industry Overview• Growth• Challenges• Trends
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