strategic valuation of pizza market leaders

Domino’s and Papa John’s Strategic Valuation Analysis

VS

Agenda• Restaurant Industry Overview• Domino’s Company Overview• Papa John’s Company Overview• Domino’s Analysis• Papa John’s Analysis• Conclusion

Global Restaurant Statistics• $1.6 trillion in revenue in 2010

– Cafes & Restaurants account for 36% ($571 b) • Marked growth is expected to slow to 3% yearly by 2015

– $1.8 trillion by the close of 2015

• Trends & Challenges– Unstable food and energy prices– Fragile housing sector – Depleted consumer confidence

• Health-conscience Consumers

(http://www.reportlinker.com/ci02054/Restaurant-and-Food-Services.html)

Restaurant Industry Overview• Growth• Challenges• Trends

Commodity Price Index

Informal Dining Segments

QSR Segments

Source: Restaurant State of the Industry Report Part 1: Food and Beverage © 2011 NetWorld Alliance LLC

Pizza Competitors

Source: PMQ Pizza Magazine September 2011

Pizzeria Rankings

Source: PMQ Pizza Magazine September 2011

Domino’s Pizza Overview• History• Ownership• Strategies

– Technology and Innovation– Supply Chain– Growth– Healthy Pizza in Schools

• Domestic v. International– Marketing

• “Oh Yes We Did!”

Domino’s Pizza Analysis

(In $Millions) FY 2009 FY 2010 FY 2011 FY 2009 FY 2010 FY 2011TOTAL NET REVENUES 1,404,057 1,570,894 1,652,193 100% 100% 100%TOTAL COST OF SALES 992,981 1,132,305 1,181,677 70.7% 72.1% 71.5%OPERATING MARGIN 386,976 438,589 470,516 27.6% 27.9% 39.8%DEPRECIATION 24,100 24,100 24,000 1.7% 1.5% 2.0%GENERAL AND ADMINISTRATIVE 197,467 210,887 211,371 14.1% 13.4% 17.9%INCOME FROM OPERATIONS 189,509 227,702 259,145 13.5% 14.5% 21.9%INTEREST INCOME 683 244 296 0.05% 0.02% 0.0%INTEREST EXPENSE (110,945) (96,810) (91,635) 7.6% 6.7% 6.3%INC. B/F PROV. FOR INCOME TAXES 135,522 138,945 167,806 9.7% 8.8% 10.2%PROVISION FOR INCOME TAXES 55,778 51,028 62,445 41.2% 36.7% 37.2%NET INCOME 79,744 87,917 105,361 5.7% 5.6% 6.4%

Common Size12 Months Ended

Domino’s Pizza Analysis

Assumptions

Revenue Growth: 5-year Forecast Period

CS: 72.0%

G&A: 12.8%

Taxes: 38.4%

Int. expense: 7.0%

Op. NWC 2.20%

Capex: 5%

DA: 1.80%

2012 2013 2014 2015 2016

Operating Profit 296,975 302,769 306,709 309,370 311,160 Taxes 114,038 116,263 117,776 118,798 119,486 NOPAT 182,937 186,506 188,933 190,572 191,675 Plus: Depreciation 37,920 38,533 38,949 39,231 39,420 Less: Capex (25,566) (26,845) (28,187) (29,596) (31,076) Less: Change in NWC 521 (749) (509) (344) (231)

Firm FCF: 195,811 197,445 199,185 199,862 199,787

Domino’s Pizza Analysis

Discount Rate (WACC) 6.78%Long-term growth rate 2.50%

Terminal Value: 4,785,614

PV FCF 183,380 173,170 163,606 153,740 143,925 PV(Terminal Value): 3,447,515

Total PV(FCFF + TV) 4,265,335 Less Current Debt 1,450,369 Estimated Equity Value 2,814,966 2,180,000 (as of 4/29/12)

Value per share 48.73 37.14 (as of 4/29/12)

Appreciation in price 31.2%

Domino’s AnalysisComparable Companies

As of April 27, 4:00PMPE

Ratio

Forward PE

Ratio PSR

Price /Share

Revenue / Share

Market Value

Shares O/S

Net Income Sales Weight

QSR Pizza SegmentPizza Hut (YUM) 23.19 19.24 2.59 73.32 28.13 33,730 460.00 1,510 12,940 20%Papa John's (PZZA) 18.26 14.55 0.80 40.17 50.33 974 24.24 56 1,220 50%QSR SegmentMcDonald's (MCD) 18.20 15.49 3.56 97.43 26.90 99,240 1,020.00 5,560 27,440 10%Starbucks (SBUX) 34.39 24.75 3.75 57.43 16.18 43,270 753.40 1,280 12,190 10%Tim Hortons (THI) 24.28 18.78 3.07 57.85 18.39 9,090 157.14 388 2,890 10%

21.46 17.03 1.96 56.02 36.94 22,393 297.17 1,053 7,450 100%

Value PPSValue

Diff.

Forward PE Valuation 1,793.75 31.05 -17.7%

PE Valuation 2,260.50 39.13 3.7%

PSR Valuation 3,227.40 55.87 48.0%

Domino's Value 2,180.00 37.74

In $ Millions (except ratios)

Papa John’s Pizza Overview• History• Growth• Market Share – 6%• Strategies

– Growth Through Quality– Better Ingredients. Better Pizza

– International Expansion– Supply Chain – QC Centers – An App for ordering

Papa John’s Pizza Overview• Ownership

– Insiders/Owners: 24%– Institutions – Mutual Funds

• Governance – Founder, CEO and Chairman– 3 Charter Committees

• Stock History– June 1993 IPO (PZZA) - $4– Today: creeping over $40

http://financehttp://finance.yahoo.com/q/pr?s=PZZA+Profile

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Papa John’s Pizza Analysis

• Assumptions– Revenue growth

• 4.09% to 2.59%– Tax Rate: 32%– Operating Leases

• Capitalize

Pro-Forma Income Statement 2012 - 2015  2011 Common Size 2012 2013 2014 2015

Total revenues 1,217,882 100.00% 1,267,693 1,313,204 1,353,782 1,388,844

Cost of sales 126,887 10.04% 127,229 131,797 135,869 139,388

Salaries and benefits 142,093 12.21% 154,840 160,398 165,355 169,637

Advertising and related costs 49,035 4.11% 52,165 54,038 55,708 57,151

Occupancy costs 32,278 2.77% 35,167 36,430 37,556 38,528

Other operating expenses 75,558 6.34% 80,413 83,300 85,874 88,098

Total domestic Company-owned restaurant expenses 425,851 35.48% 449,814 465,963 480,361 492,802

Cost of sales 426,955 34.16% 433,103 448,651 462,515 474,494

Salaries and benefits 35,141 2.98% 37,745 39,100 40,308 41,352

Other operating expenses 53,188 4.24% 53,761 55,691 57,412 58,899

Total domestic commissary and other expenses 515,284 41.38% 524,609 543,442 560,235 574,745

International operating expenses 35,674 2.70% 34,228 35,457 36,553 37,499

General and administrative expenses 111,608 9.58% 121,388 125,746 129,632 132,989

Other general expenses 9,767 0.91% 11,504 11,917 12,286 12,604

Depreciation and amortization 32,681 2.79% 35,343 36,611 37,743 38,720

Total costs and expenses 1,130,865 92.35% 1,170,735 1,212,764 1,250,238 1,282,620

Operating income 87,017 7.65% 96,959 100,440 103,543 106,225

Investment income 755 0.07% 836 866 893 916

Interest expense -4,668 -0.31% (7,082) (6,512) (5,928) (5,592)

Income before income taxes 86,275 7.41% 93,885 97,255 100,260 102,857

Income tax expense 26,888 30,043 31,122 32,083 32,914

Net income, including noncontrolling interests 59,387 63,842 66,134 68,177 69,943

Less: income attributable to noncontrolling interests -3,732 -0.32% (4,002) (4,146) (4,274) (4,384)

Net income, net of noncontrolling interests $55,655 4.73% 60,008 62,162 64,083 65,743

Papa John’s Pizza Analysis• Discount Rate (WACC): 6.05% (calculated)

– Terminal Growth Rate: 2.5%– Risk Free Rate: 2.5%– Equity Risk Premium: 5%

  2012 2013 2014 2015 Terminal value

Net income, net of noncontrolling interests 49,100 51,731 54,129 56,086  

Plus: Depriciation and Amortization $47,965 $49,233 $50,365 $51,342  

Operating Net Working Capital $23,716 $23,875 $24,035 $24,196  

Less: Increase in Net Working Capital 10,059 159 160 161  

Less: Capex 31,358 29,321 27,415 25,634  

Projected FCFF $55,647.56 $71,485 $76,919 $81,634 $2,359,623

Present value of FCFF 52,475 63,566 64,498 64,549 1,865,794

Total present value of FCFF 2,110,882    

Papa John’s Pizza Analysis• Discount Rate: 9.35% (implied)

– Terminal Growth Rate: 2.5%– Risk Free Rate: 2.5%– Equity Risk Premium: 5%

  2012 2013 2014 2015 Terminal value

Net income, net of noncontrolling interests 49,100 51,731 54,129 56,086  

Plus: Depriciation and Amortization $47,965 $49,233 $50,365 $51,342  

Operating Net working Capital $23,716 $23,875 $24,035 $24,196  

Less: Increase in Net operating capital 10,059 159 160 161  

Less: Capex 31,358 29,321 27,415 25,634  

Projected FCFF $55,647.56 $71,485 $76,919 $81,634 $1,219,749

Present value of FCFF 50,885 59,772 58,811 57,074 852,779

Total present value of FCFF 1,079,320    

Papa John’s Analysis, Cont.• Relative Valuation

In Millions (except ratios)

Comparable Companies PE RatioForward PE

Ratio PSRPrice

/ShareRevenue /

ShareMarket Value

Shares O/S

Net Income Sales Weight

QSR Pizza Segment

Pizza Hut (Yum! Brands) 23.19 19.24 2.59 73.32 28.130435 33730 460 1510 12940 20%

Papa John's 18.26 14.55 0.8 40.17 50.330033 973.8 24.24 55.65 1220

Domino's 21.72 16.65 1.28 37.14 28.561537 2150 57.77 105.36 1650 50%

QSR Segment

McDonald's 18.2 15.49 3.56 97.43 26.901961 99240 1020 5560 27440 10%

Starbucks 34.39 24.75 3.75 57.43 16.179984 43270 753.4 1280 12190 10%

Tim Hortons 24.28 18.78 3.07 57.85 18.391243 9090 157.14 388.26 2890 10%

23.185 18.075 2.196 54.505 26.054174 22981 313.939 1077.506 7665 100%

  Value PPSValue

Difference

Forward PE Valuation $1,005.87 $41.50 9.50%

PE Valuation $1,290.25 $53.23 40.45%

PSR Valuation $2,679.12 $110.52 191.64%

Papa John's Valuation $918,640 $37.90  

Conclusion

Papa John's Valuation Summary Value PPSValue

Diff.DCF 1,950 80.46 112.30%

Forward PE 1,006 41.50 9.50%PE 1,290 53.23 40.45%PSR 2,679 110.52 191.64%Papa John'sToday 919 37.90

Domino's Valuation Summary Value PPSValue

Diff.DCF 2,875 49.77 31.89%Forward PE 1,794 31.05 -17.7%PE 2,260 39.13 3.7%PSR 3,227 55.87 48.0%Domino's Today 2,180 37.74

Discussion

Pizza Facts• $30 billion industry• 350 slices per second consumed in US• 61,269 pizza parlors in US • 3-11 year old favorite food for lunch or dinner• Average American eats 46 slices;

– 23 pounds of pizza annually– 3 billion pizzas per year overall

• Americans consume 251,770,000 pounds of pepperonis per year• Most popular “ethnic” food in America

– Source: http://library.thinkquest.org/J0112790/facts.html