Has the Public Moved Beyond the Papa John’s Saga as Its Stock Has Recovered?

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Corporate scandals are nothing new, and the one common throughout many scandals is that they can be painful. The pain can be a tarnished image or it can be financial pain, and frequently it’s both. That’s particularly true in the modern era when a company’s founder is reported to have made a racial slur. That has been the story of Papa John’s International, Inc. (NASDAQ: PZZA). It seems that companies can move on, and Papa John’s has been recovering handily after deep losses. With a rebounding stock price and a wave of analyst upgrade after a new CEO appointment, it’s time to look under the hood and try to see if Papa John’s stock is going to continue running higher.

Founder and chairman John Schnatter resigned from the company in the summer of 2018 after he was forced to apologize for having used a racial slur during a conference call earlier that year. While there was a controversy over what the context and intent was on Schnatter’s part, the damage was done and the saga created a wrecking ball that hurt the company enough that its annual sales of $1.57 billion in 2018 were down almost 12% from 2017.

Papa John’s shares were trading closer to $62.00 at the end of April, without accounting for the $0.225 dividend that is paid each quarter. The stock briefly went under $40.00 by August of 2018. While the shares made it back over $50.00 in March of 2019, the highest the shares have been was about $54.00. This June the shares went from $44.00 and have gradually ground higher and higher since then to a current price above $49.00.

It’s hard to know if the public holds on to certain images or not, but the research community has moved beyond the problems of 2018 and there have been many positive research calls.

Just on Thursday, September 5, 2019, Papa John’s was raised to Outperform from Neutral and its target price was raised to $56 from $45 (versus $48.15 close, after a 3.3% gain) at Credit Suisse.

It turns out that the 3.3% gain the prior day was after a firm called Northcoast Research initiated coverage with a Buy rating. The firm had even gone as high as issuing a $70.00 price target.

These calls are after Papa John’s hired Rob Lynch, formerly of Arby’s, to be CEO of Papa John’s. After looking over our daily analyst calls and at outside coverage, there have been multiple analyst upgrades and target hikes in the last 30 days alone:

  • On August 28, Stifel raised its Hold rating to Buy and lifted its prior $42 target up to $60.
  • On August 27, BTIG Research raised its prior Neutral rating up to Buy and set a $54 target price.
  • On August 15, Citigroup reiterated its Buy rating but trimmed its target down to $58 from $60 to have a more reasonable target.
  • And on August 13, the firm MKM Partners initiated coverage with a Buy rating and it assigned a $55 target price.

All of these analyst upgrades were after Papa John’s had issued earnings news on August 6 that the North America comparable sales in its second quarter had fallen by 5.7%. Its CEO at the time had installed some new menu items and had set some new marketing campaigns. And in March of 2019, Papa John’s named NBA Hall of Fame member Shaquille O’Neal as a board member and as the new face of the company.

Another development in 2019 is that Papa John’s reached a settlement agreement with John Schnatter, and Mr. Schnatter has started selling shares again to lower his stake in the pizza franchise. He held 9.23 million shares back in early May, and the latest sale on August 22 took his stake down to 4.78 million shares. That is still nearly twice as much as the largest institutional holders as of June 30:

  • Blackrock owned 2,543,015 shares for a 8.00% stake;
  • Jackson Square Partners owned 2,534,066 shares for a 7.97% stake;
  • T. Rowe Price owned 2,324,866 shares for a 7.31% stake;
  • and Vanguard owned 2,025,295 shares for a 6.37% stake.

Now Papa John’s is being run by a new CEO and the analyst community has been giving new endorsements of their own with much higher share price targets.

Papa John’s shares were last seen trading up 2.7% at $49.44 shortly before the close on Thursday. Its 52-week trading range is $38.29 to $60.56 and its consensus analyst target price has risen to $56.44.

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