Pizza Stocks at Resistance

August 14, 2013, 14:47 pm ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Pizza stocks can deliver serious profits if you know which ones to buy.  Recent earnings have shown mixed results for the largest pizza companies though, so let's dig a little deeper to try to uncover some opportunities, be it long or short.

Papa John's Int'l, Inc. (NASDAQ:PZZA) second-quarter 2013 earnings of 76 cents per share beat estimates of 69 cents by 10.1% and the comparable year-ago quarter’s earnings of 59 cents by 28.8%. Papa John’s has been posting solid earnings and revenue growth for the past few quarters on the back of higher traffic and unit growth. The company’s focus on menu innovation and international expansion are paying off for investors as well; Papa John's has returned over 25% in the last six months and over 36% in the last year.   A near-term driver will be the return of Football this fall; Papa John’s is the Official Pizza Sponsor of the NFL. However, the company is facing the headwinds of food cost inflation which may hurt its margins in the ensuing quarters. If food costs go up Papa John's could get hit the hardest because it focuses on higher quality ingredients, which are more expensive.  Stock Traders Daily has Papa John's strong near-term, but the stock is in play because it is testing long-term resistance, if resistance holds the stock could reverse all the way to longer term support, and that could spell trouble for new buyers at these levels.

Domino's Pizza, Inc. (NYSE:DPZ) competes with Papa John's and Yum Brands, Inc. (NYSE:YUM) which owns Pizza Hut. Dominos has been showing solid figures for the past few quarters, the biggest winner for the company has been the new handmade pan pizza, which has become about 20 percent of U.S. sales for Dominos.  Thick crust pizzas boost pizza makers’ profit margins because they’re higher-priced but require only minimally more ingredients and preparation time. Dominos is heavily franchised with 90% of its domestic operations and the whole international business being franchised. The company is showing a strong international presence, with more than 70 consecutive quarters of positive same-store sales. Its international growth was higher than that of its closest peers too. But the cool part, Domino’s focus on digital ordering technology added more than $2 billion in global digital sales last year. The company’s mobile ordering apps have been downloaded more than 6 million times and the company’s stock has outperformed both YUM and PZZA with better than an 80% return to investors over the last year largely due to this innovation.

So, who isn’t doing well?

Yum is struggling in China, the KFC, Taco Bell and Pizza Hut operator reported a 13% drop in July same-store sales in China, with a 16% drop at its KFC restaurants, partially offset by a 3% rise in comps at Pizza Hut. The company blamed the miss on the heat wave in China, claiming customers were looking for cold drinks and ice cream which isn’t offered at KFC and Pizza Hut. China is so important because it accounts for more than half of Yum's revenue. Stock Traders Daily has YUM weak near-term, but the stock is in play because it’s still near long-term resistance, and the stock could fall all the way back to long-term support if it fails to break above resistance.

Pure pizza plays are performing much better both domestically and internationally given what we know, but  the stocks are trading near 52 week highs and long-term resistance so as investor you need to ask yourself if it makes sense to buy at long term resistance levels.   By rule our analysis tells us to expect stocks to fall after resistance levels are tested, our rules tell us to target support, and so long as stocks are at resistance levels without breaking above them we do not expect significant upside.  This is true for durational plays, but reasonably the stocks could move slightly higher near term without breaking longer term trends; that is where the strong near term rating for Papa John's comes from, for example.

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