And of Course There’s a Way to Invest
TL;DR
Americans eat a lot of pizza, much of which comes from publicly traded corporate entities. In a well-diversified portfolio, these stocks could provide safety and yield. But like the foodstuffs these companies offer, there’s some vetting to be done about their stocks.
October’s National Pizza Month and we’d be remiss to not acknowledge that. After all, we have very strong opinions about America’s favorite food.
This year, Food & Wine found that the average American consumes pizza three times a month (with 38% of you animals dipping your slices into ranch dressing).
And while we contend that the best pies in America come from family-owned pizza parlors, we’re cognizant that not everyone has access to a Patsy’s Pizzeria. A friend in Georgia, for example, once had the dreadful option of only being able to choose between Papa John’s or DiGiorno.
But we digress ….
Most people in this country get their pizza from chain restaurants that supply every single state with subpar pies. And some of those companies are publicly traded. However, while a few of them are trading for less than their perceived fair market values, it might not be the best idea to invest in them.
Let’s explore …
A Sector Analysis
Before diving into a few of the companies that make billions from huckstering previously frozen crusts topped with uninspired sauce and pre-shredded cheese (loaded with anti-caking agent plant cellulose — literally wood pulp) topped with nary a hint of parmesan or Italian seasoning, let’s first explore the sector these so-called pizzerias operate within.
Foods — like hygiene products, beverages and clothing — are consumer staples. And of the S&P 500’s 11 sectors, consumer staples have performed fourth-best over the past six months with an 8.88% return:
And while that has marginally underperformed the broad market’s return of 9.89% over the same period, there’s a sense of security that investing in consumer staples provides.
No, these are not flashy tech companies with explosive upside (and downside) potential. But unlike the tech sector, most consumer staples companies have lengthy track records, pay dividends and are considerably lower in volatility.
That lower risk (and lower upside potential) makes them appealing as hedges, which is why they’re often centerpieces of more conservative investors’ portfolios.
Another reason? Consumer staples are inelastic in demand, meaning that when the market (or economy) takes a turn for the worst, people will always continue buying food, hygiene products, beverages and clothing. Nothing is recession-proof, but consumer staple stocks are recession-resistant.
What they aren’t is exciting. These aren’t companies breaking ground in biotech or ushering in the next applications of AI.
Rather, we’re talking about big and boring companies that investors would be wise to buy and hold. To quote the late, great Charlie Munger, “The big money is not in the buying and the selling but in the waiting.”
But Are Pizza Stocks Worth the Wait?
As inferior as their pizza may be, the leaders of these companies excel in business acumen. That’s not something every billionaire can claim, but for the CEOs of Big Pizza, they’re doing something right (despite making pizza more suitable for livestock consumption).
And right now, some of these stocks are trading at a discount.
So for investors with long-term horizons, should you consider adding them to your holdings?
No. 1: Yum! Brands
We’re sure you’re familiar with the suite of eateries that fall under the Yum! Brands (YUM) umbrella: KFC, Taco Bell, Habit Burger … and Pizza Hut.
YUM has had a spotty record lately, beating on earnings nine times and missing 7 times in the past 16 quarters going back to Q3 2020. Last quarter, it saw sales growth from its KFC and Taco Bell businesses while Pizza Hut remained flat.
But the company’s revenue has grown steadily since 2020 when it posted $5.65 billion. That figure increased to $6.58 billion in 2021, $6.84 billion in 2022 and $7.08 billion in 2023.
Over the same period, its free cash flow — a measure of a company’s profitability that shows by how much (or how little) its operating cash flow exceeds expenses and capital assets — grew from $1.15 billion to $1.32 billion and is on track to surpass the $1 billion mark again in 2024.
One concern, though, is that YUM’s liabilities far surpass its assets over the past several years. In 2023, liabilities were $14.09 billion to $6.23 billion in assets.
Nonetheless, the stock is trading at a P/E ratio of 25.26 and has managed an 8.28% gain in 2024. Analysts at the Wall Street Journal give YUM a one-year median price target of $147.50, representing a 5.57% increase from its current share price of $139.71.
The $37.78 billion market cap company pays a dividend that yields 1.92%, or 67 cents/quarter at current prices.
Verdict: Probably safe … like their stuffed crust pizza.
No. 2: Domino’s
With just half the market cap of YUM, Domino’s (DPZ) is just as recognizable a brand. But despite a year-to-date gain of 3.91%, shares are struggling since mid-July, having fallen -12.37% since.
Oddly, that sell-off coincided with a Q2 earnings beat when the company posted an EPS of $4.03 vs. analysts’ expectations of $3.68. So why the tempered enthusiasm?
For one, institutional ownership may be falling. Despite 97.94% institutional ownership, last month financial services company State Street — one of the top three major asset management companies and the second-oldest continuously operating bank in the U.S. — announced that it is no longer a “substantial holder” of Domino’s.
It’s a similar story for company insiders (e.g., the CEO, CFO, COO, directors, etc.). Over the past three months, buyers have been outnumbered by sellers 10 to 1, and over the past year, that ratio is 31 buyers to 52 sellers.
Importantly, Domino’s only beat revenue expectations once in the past nine quarters. And on an annualized basis, 2023 saw lower revenue ($4.48 billion) than 2022 ($4.54 billion), with a trailing 12-month basis of $4.61 billion unlikely to change that pattern by the end of 2024.
The company was only able to muster free cash flow of $485.63 million in 2023, down from the $560.05 million posted in 2021. And on a trailing 12-month basis, free cash flow is just $353.24 million … which is trending in the wrong direction.
The stock, whose dividend yields 1.41%, currently has a P/E ratio of 26.34. The Journal’s median one-year price target is $491, with shares currently trading for $429. But given the exodus of institutional owners and company insiders, we’re not enthused.
Verdict: Follow the money and look elsewhere.
No. 3: Papa Johns
Papa Johns (PZZA) is perhaps the most grotesque excuse for pizza sold in the U.S. Its garlic sauce is so repulsive and contains so many chemicals, we’re surprised the writers of Back to the Future didn’t have Doc Brown use it to power the flux capacitor when the film debuted one year after the pizza chain was founded in 1984.
If Papa Johns was a household fixture, it’d be a toilet. If it was a sport, it’d be NASCAR. If it was a haircut, it’d be a mullet. But strong opinions about its pizza aside, there’s plenty to dislike about the company’s financials.
In the last eight quarters, PZZA beat earnings expectations five times but missed on revenue forecasts seven out of eight times. Total revenue has remained flat since 2021 — not a strong indicator of growth.
Meanwhile, free cash flow jumped from $39.42 million in 2022 to $119.89 million in 2023, but on a trailing 12-month basis, the company has posted just $29.86 million. Again, trending in the wrong direction.
The $1.75 billion market cap company is currently carrying $1.32 billion in liabilities to $875 million in assets. And while its dividend yields an attractive 3.42%, or 46 cents/quarter at current prices, shares are down -29.09% in 2024 despite trading at a 25.65 P/E ratio.
Zooming out shows the problem is worse: Since hitting its all-time high of $133.45 on Dec. 31, 2021, PZZA has fallen -59.69%. The Journal’s analysts give Papa Johns a median one-year price target of $51, lower than its current share price of $53.64.
Verdict: Like their pizza, avoid like the plague.
Be sure to conduct your own due diligence. But if you’re searching for a layer of safety to add to your portfolio while also adding a dividend-payer, don’t overlook consumer staples. Perhaps not one of the aforementioned “pizzerias,” but the sector is broad and includes dozens of companies that exhibit fundamental strength.