Why This Analyst Thinks Papa John's Will Deliver Delicious Returns in 2021

Papa John’s International Inc. (NASDAQ: PZZA) has been one of the stronger performing restaurants during the COVID-19 pandemic. One analyst thinks this performance will only continue to improve this year.

Oppenheimer upgraded Papa John’s to an Outperform rating and raised its price target from $110 to $125, implying an upside of 20.6% from the most recent closing price of $103.68. The brokerage firm also added Papa John’s to its 2021 top picks list.

The firm noted that its analysis highlights multiyear upside in same-store sales, unit growth and enterprise-level margins culminating in a craveable future earnings algorithm. Oppenheimer sees added optionality from Papa John’s low financial leverage and takeout attributes. In the very near term, the narrative will continue to deal with fears of lapping COVID-19 benefits (starting in the second quarter) and Oppenheimer would take advantage of any related pullbacks.

Oppenheimer detailed in its report:

Beginning in ’22, our work suggests strengthening global unit growth (+4-6%) can complement low-to-mid-single SSS and drive ongoing EBITDA of 8-12% annually. Importantly, this excludes any upside from improving margins at co-owned stores (38% of EBITDA) or commissaries (14%), which we anticipate to activate upside to our estimated algorithm. We sit 5% above Street’s 2022 EBITDA, but see room.

Also, a new chief financial officer and strong cash generation (about $100 million in free cash flow annually) position Papa John’s to communicate a more comprehensive capital allocation strategy following its $75 million repurchase authorization last quarter, according to Oppenheimer. Its balance sheet is also underlevered (2.5 times by end of year), which together could allow for accelerating company-owned builds, debt reduction or increased dividend/buybacks, all of which are accretive to consensus expectations.

Papa John’s stock traded down 1% on Monday to $102.18, in a 52-week range of $28.55 to $110.33. The consensus price target is $104.47.