How You Could Profit From Pizza in Your Portfolio

How You Could Profit From Pizza in Your Portfolio

In an industry dominated by larger payers like Yum! Brands' Pizza Hut and Domino's Pizza , Papa John's International is differentiating itself with a focus on quality, attention to detail, and superior customer service. This high-quality pizza hub is well positioned to deliver hot and tasty profits for years to come.

All about quality
With nearly 15,000 Pizza Hut stores all over the world, Yum! Brands has positioned itself as the industry giant when it comes to pizza. The owner of KFC, Taco Bell, and Pizza Hut is the largest quick-service restaurant operator on the planet and this provides cost advantages and economies of scale for the company. On the other hand, this kind of scale usually means highly processed ingredients and more artificial products.

Due to negative publicity stemming from poultry suppliers in the region, KFC is seeing declining sales in the key strategic market of China, but that doesn't seem to be a problem for Pizza Hut since Pizza Hut same-store sales increased by 5% during the last quarter in China. In the U.S., on the other hand, growth has been lackluster lately, with same-store sales at Pizza Hut falling by 1% in each of the last three quarters.

Domino's Pizza had 10,440 stores as of the end of the last quarter, more than half of them outside the U.S. Domino's is a widely recognized name in pizza delivery, and the company is an efficient operator generating tasty results for shareholders over the years: Earnings per share have increased at 20.5% annually in the last five years.

The business is going strong as of the last quarter; Domino's delivered a 5.4% increase in domestic same-store sales and a growth rate of 5% in international same-store sales during the third quarter of 2013. The company is well positioned to continue growing and generating value for shareholders but, just like Pizza Hut, Domino's relies more on prices and reach than on product quality when it comes to competitive strength.

Papa John's doesn't have the same scale or geographical reach as Pizza Hut and Domino's, but the company has already proven its ability to successfully expand both in the U.S. and abroad. It has 4,296 restaurants operating in all 50 states and in 35 countries. Papa John's owns 1,050 restaurants outside the U.S., and international expansion is looking like a promising opportunity for the company over the coming years.

What the company lacks in quantity it compensates for with quality: Papa John's is led by founder and CEO John H. Schnatter, who has always been willing to put his name and reputation behind the company's products. The company's slogan: "Better Ingredients. Better Pizza" is quite clear in that respect.

The company uses fresh-packed tomato sauce in its products, which, according to its website, are "minimally heated to retain maximum flavor, as opposed to re-manufactured sauces that are subjected to more flavor-damaging heat." Its beef doesn't contain any artificial flavors, colors, preservatives, or bulking agents like TVPs (textured vegetable proteins) or cornstarch.

Papa John's is quite selective about each of its ingredients, from its fresh hand-tossed dough to its "unique white-on-white box that helps to protect the pizza from the taste of cardboard packaging."

This means higher costs and operational complications for the company, but customers seem to really appreciate this superior quality: Papa John's has earned the top spot in customer satisfaction among national pizza chains in the American Customer Satisfaction Index (ACSI) survey in 12 of the last 14 years.

By the numbers
Papa John's is deliveringmuch more than hot pepperoni pizza; revenues increased by 6.4% in the last quarter on the back of comparable-store sales growth of 1.8% in North America and a whopping jump of 8.1% in international comparable-store sales. Strong international demand bodes well for the company when it comes to global expansion opportunities.

Earnings per share during the quarter increased by 18% to $0.65 per diluted share, and management also raised guidance for the rest of the year. Earnings-per-share guidance for 2013 was raised to between $3.02 and $3.10 from a previous guidance of between $2.92 and $3.

Same-store sales are expected to grow between 7% and 8% in international markets, while North America same-store sales growth is forecast in the range of 2.5% to 2.3% for 2013. Keeping this in mind, it makes a lot sense for Papa John's to focus on global opportunities; the company will open 245 to 275 new stores in 2013 and between 160 and 180 of those will be in international locations.

Pizza is a globally popular product, and considering how strongly same-store sales are performing in the international segment, there seems to be a good reason for the company to be named Papa Johns International.

Bottom line
Papa John's has a simple and effective proposition: delivering high-quality pizza to customers around the world. This may not sound very spectacular or sophisticated, but it can be a mouthwatering recipe for growing profits in the long term.

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Fool contributor Andrés Cardenal has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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