- WHITE PAPERS
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 their 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, warns that high cheese prices have hurt pizzeria operators' profits, but like Collier, he, too, is bullish on pizza.
"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 opening an average of 400 stores per year through the late '90s, Louisville, Ky.-based Papa John's (PZZA: NYSE) stock price struggled when store-number growth slowed to near 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. But it rebounded slowly throughout 2001, posting a mid-year high of $29.64 before dropping to hover near $25 for much of the third 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 at a May high of $48.75. It has since stayed near the $40 mark. Steady but small same-store-sales gains at Pizza Hut helped push the price higher, said Collier, as well as store trade dress updates and improved toppings.
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 mid-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 about $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."
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 the mid-30s.
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."
Financial data and quotes are from Yahoo! Finance.
Stephens Inc. (a brokerage and research in Little Rock, AR)
Vice president of investor relations