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Pizza begins bullish trend
March 16, 2010 - Jennifer Litz
As of Friday's closing, pizza's No. 1 and 2 brands – Yum! Brands' Pizza Hut, and Domino's – had reached year-long highs. So did 500-plus-strong Chuck E. Cheese, known on Wall Street as CEC Entertainment Inc.
New marketing campaigns can be credited with starting the top two brands' ascent. Domino's started its "Oh yes we did" revamped recipe campaign last December, and the stock has doubled, from a 52-week low of $6.10 last March (and similar price points in December) to $13.90 as of Friday's close – and climbing.
Pizza Hut debuted its new but nostalgic spots more recently. Its inaugural commercials with new ad group The Martin Agency first ran during the Super Bowl. Pizza Hut parent Yum! Brands' shares skyrocketed to its highest levels in two years last week after UBS analyst David Palmer boosted his Yum! rating to "buy" earlier this month. Since then, the stock has kept climbing, to a year-long high close of $37.60 Friday. CEC's 52-week high close was not far off at $34.40.
So, why this month? And when will the bubble burst?
Brad Ludington, restaurant analyst with Dallas-based KeyBanc Capital Markets Inc., believes the immediate stock boosters to be two-fold – and sustainable. He said commodity cheese prices have been down since their December highs in the $1.70 per pound range. Now they're hovering around $1.27.
He also said restaurant management teams attending various restaurant and consumer conferences have distributed mostly positive commentary to investors.
Ludington believes the boost is easily sustainable, at least in the short term.
"We may be reaching 52-week highs, but the last year's share prices and valuations have been very depressed," he said. "So I do think these levels are still, for a lot of these stocks, very reasonable and very sustainable."
Longer-term factors may also be pushing the stocks up – but also may rein them in along the bumpy road to recovery, according to Benjamin Shepherd, editor of financial newsletter Louis Rukeyser's Wall Street. He says the "large volume" increases seen in Domino's stocks could be a "low-risk bet" from investing institutions following the mores of business cycle investing.
"They (banks and fund managers) don't want to miss the clear up-cycle in discretionary names, which is being driven by the fact that we are seeing consumers beginning to open up their wallets again," he said. "That's leading many of them to look at lower bracket discretionary names – such as Domino's. Given the low price point of a pizza, it's a luxury that pretty much everyone can afford, likely even those drawing unemployment checks."
Both Ludington and Shepherd admit the obvious: Nobody can be sure what stocks will do. But Shepherd thinks it won't take long to find out.
"Most of the folks I've spoken to in the bear camp seem to think if we're going to see another correction, it'll probably fall sometime in April or May," he said.
*Flickr photo by Idol
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