Papa John's
May Be Undervalued
By Burgess Hallums, editor
Apollo Small Cap Stock Report
For
the first time in over a year, the small cap buy list is longer
than the large cap buys. Could this be the turning point to resume
the outperformance of the small fry over the big guys that we
saw developing in 2000/2002? There is still plenty of volatility
to go around, and we fully expect the climb, if it is sustained,
will not be without serious consternation.
A Buy for our conservative
Aurora Portfolio is Papa John's International (PZZA $29.13),
which is the number three-pizza chain after Pizza Hut and Domino's.
Providing primarily pizza delivery and carryout services only,
PZZA has 611 company owned and 2,118 franchised storefronts in
47 states and nine international markets. In the United Kingdom,
Papa John's restaurants are known as Perfect Pizza. Founder,
chairman, and CEO John Schnatter owns about 30% of the company.
Papa John's is well
beyond its growth phase, which may help to explain why the stock
price has remained strong during current market conditions. Over
the past 52 weeks, the stock has risen 6.1%, outperforming the
S&P 500 by 28.8%. Another positive achievement is the Company's
ability to increase earnings-per-share each and every year. 2002
is expected to finish with an EPS 12% above 2001, and 2003 is
expected to increase an additional 6%. The likelihood of the
PZZA reaching these marks is high as the company beat earnings
estimates in the second quarter of 2002 and is on record as saying
that they expect to meet high-end estimates for the third quarter
when earnings are released on October 29. Other positives include
a lower than average price-to-earnings multiple and a lower than
average price-to-sales multiple. Both of which are indicators
that the stock may be undervalued.
At 53%, the Company's
debt is a little on the high side. Institutions own 57% of the
outstanding shares, which is also a little on the high side,
and the percentage of shares currently short is 21.5%, which
may be viewed as a positive or a negative depending upon your
investment approach.
Twenty-one percent
short is a lot, relatively speaking. It indicates that many investors
are betting the stock price will decline. At some point, however,
those investors will have to buy shares to cover their short
positions, and, as a result, drive the price higher.
Recently, the stock
price pushed through its 50 day and 200 day moving averages,
traditional buy signals for the technical investor, which is
one reason why we feel that the likelihood of price appreciation
is greater than the chance of price declines. Papa John's low
Beta of 0.54 makes it an excellent selection for more conservative
portfolios.
Editor's Note: Burgess
Hallums is a money manager and editor of the Apollo Small Cap
Stock Report, 10680 Treena St., Ste. 163, San Diego, CA 92131,
1 year, 12 issues, $99.
