The past few years have been watershed times in the stock market as the Internet and tech-stock boom led to unprecedented buying-and unprecedented overvaluing of stocks.

Eventually many dot-coms became not-coms, and brokers returned their attention to better-established businesses that actually delivered on promises to make money.

U.S. pizza companies were among that group then, and, analysts say, they still are now.

"The pizza category, I believe, looks great," said Lynne Collier, analyst with the Little Rock, Arkansas-based research and brokerage firm Stephens, Inc. "Based on two reasons: one is short term, and that is that people are staying at home watching news coverage. The second thing I like is the fact that we're in a slowing economy, and I believe consumers will continue to eat out, but they may trade down in price. My investment thesis prefers those stocks that fit in those low ticket averages, and pizza fits there."

Ron Paul, president of Technomic, a Chicago-based foodservice research and consulting firm, is bullish on pizza, too.

"Cheese prices have ... hurt the margins," said Paul. "But pizza is one of those absolutely great foods to have at home. It's not a gourmet convention food-it's a comfort food. And right now, from all conventional wisdom, comfort food should do better."

Doing the Numbers

After peaking at a breakneck store-opening pace of 400 per year in the late '90s, Louisville, Ky.-based Papa John's International (PZZA: NYSE) stock price has struggled since new store openings dropped below 300. A 2000 lawsuit with Pizza Hut and a profit-pinching industry-wide price war helped push the stock to a 52-week low of $19 in 2000. But it rebounded slowly throughout 2001, posting a mid-year high of $29.64 before dropping and hovering near $27 as it moved in to the fourth quarter.

"In the face of a NASDAQ that's down 60 percent, our stock has hung in there," said Chris Sternberg, vice president of investor relations for Papa John's. "Of course we always want the price to go up, but we feel it's hung in there pretty well."

Tricon Global (YUM: NYSE), based in Louisville, operates Pizza Hut, Taco Bell and KFC, has seen broader gains in the past year. The stock ended fourth quarter 2000 around the $25 mark, but has risen steadily, peaking in November at more than $52. Steady but small same-store-sales gains throughout the year at Pizza Hut helped push the price higher, said Collier, as well as store trade dress updates and improved toppings.

Pizza Hut showed a 6 percent drop in same-store sales late in the third quarter and a 10 percent drop in October, its sister companies showed strong same-store gains, keeping the stock buoyed nicely near the $50 mark.

Smaller publicly traded pizza companies have not done as well. Los Angeles-based California Pizza Kitchen (CPKI: NASDAQ) has fallen off of a 52-week high of $35.125 to an average in the high-teens. Dallas-based Pizza Inn (PZZI: NASDAQ), which operates 484 restaurants in 20 states, has been even more volatile, falling from a 2000 high of $3.38, to just below $2.

Collier generally doesn't recommend stocks which fit into novelty or theme categories, but she makes an exception of Chuck E. Cheese, headquartered in Dallas."They are the only player providing entertainment to children in the 2 to 12 age category," she said. "And this company has been around for a long time."

Stock Answers

If you're a market player or an especially close watcher of foodservice company stocks, consider this advice from Herb Greenberg, senior columnist at TheStreet.com. The following tips are excerpts from a recent column.


Rule No. 1: Just because you like the food doesn't mean you should buy the stock. The best menu can't counter bad fundamentals or a sloppy economy.

Rule No. 2: A long line out the front door doesn't necessarily mean sales are booming. Lines matter only if they're getting longer, and the one real way to measure that is through same-store sales of restaurants open more than one year.

Rule No. 3: Don't get taken in by analysts hyping a new concept with grandiose forecasts.

Rule No. 4: The faster the chain grows, the more likely it is to stumble. (Think Boston Market.) "There's a point at which you simply run out of places with the population density necessary to support additional stores," said Rick Shea of Vardon Capitol.

Rule No. 5: The golden rule of making (not losing!) money in the restaurant business: Follow the money. In recent months insiders have been selling or registering to sell shares of Cheesecake Factory, P.F. Chang's, and California Pizza Kitchen. At CPK, in fact, controlling investor Bruckman Rosser Sherrill & Co. has peeled off a substantial part of its holdings this year. The message for investors: If insiders are bailing out, maybe you should be too.

CEC Entertainment (CEC: NYSE), parent company of 394-store Chuck E. Cheese, has had a volatile year. Late in 2000 the stock sold for a low of $27.88, but record sales for 2000 combined with better-than-expected earnings for the first quarter of 2001 nearly doubled the price to $55.50. However, same-store sales declines of about 3 percent during the second and third quarters pushed the stock back into around $36.Stocks of smaller public pizza players provided flat performance as well.

Chicago Pizza & Brewery Inc., a dual-concept company with 18 full-service pizza restaurants, turned in respectable profits for second quarter 2001 (net income of $985,000 on $15,974,000 in revenues, 395 percent better than in the same period last year). Still, share price, which peaked at $5.70 in July, was closer to $5 in November.

Pizza Inn peaked at $3.38 in November 2000, but the 486-store Dallas chain's share price dropped below $2 in March and has bobbed there since. Net income in its fourth quarter, which ended in June, was just $701,000 on revenues of $16.1 million. Chainwide sales for the quarter were $46.1 million, $3.2 million less than in the same quarter last year.

Recession Proof?

Industry analysts disagree on whether such a thing as a recession-proof stock-one that weathers any economic storm-exists, they say pizza stocks do come close to that mark.

"I don't want to go out on a limb and say that pizza is recession proof," Collier said, "but I think there would be a minimal impact of a slowing economy, if any at all, on pizza consumption. In a slowing economy, and possibly a recession, people are more price sensitive, and pizza is a very good price value. I don't know if it's recession proof, but it's as close as you can get."

At the very least, said Paul, pizza is recession resistant.

"It's more likely to do better when times are slow," said Paul. "Pizza is a shared food, it's economical, it's hard to find people who don't like it. But don't forget, we still have pizza at supermarkets, and if people are concerned about money, they can trade down to supermarket pizza. That's the only real threat."

Even if an economic downturn signals good times for pizzeria operators, Sternberg said operators should never perceive price-conscious customers as low-hanging fruit.

"Certainly it seems logical that folks might want to eat more pizza ... that they don't want to spend the higher dollars to eat out at an upscale restaurant," he said. "But the truth of the matter is, we have to earn the customer's business every day, regardless of what the economy is doing. The customer is very discerning, and we have to give them a good product at a fair price, regardless of what the economy is like."

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