Shake Shack vs. Papa John's: Which Restaurant Stock is a Better Buy?

Papa John's International, Inc. (PZZA) in Louisville, Ky., and New York City’s Shake Shack Inc. (SHAK) are well-known restaurant operators. PZZA operates and franchises pizza delivery, dine-in, and carry-out restaurants under Papa John's trademark. As of June 29, 2021, it operated 5,400 Papa John's restaurants. In comparison, SHAK operates as a fast-casual restaurant that offers food and beverages. As of December 30, 2020, it operated 311 Shake Shacks.

With the resurgence of COVID-19 cases, the restaurant industry is focusing more urgently on digitizing operations and strengthening contactless delivery services to maintain sales. This, along with a strong vaccination drive, should help the industry stay afloat in the near term. The U.S. restaurant industry is expected to grow at a 4% CAGR to $514.13 billion by 2027. So, both PZZA and SHAK should benefit.

But while SHAK’s shares have declined 26.1% in price over the past six months, PZZA has surged 54.3%. And PZZA is a clear winner with 9.1% price gains versus SHAK’s negative returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On August 5, 2021, PZZA expanded its partnership with its largest franchisee, Drake Food Service International (DFSI), to open more than  220 Papa John’s restaurants across Latin America, Spain, Portugal, and London by 2025. DFSI has been a valued and strategic partner in accelerating the company’s reach in international markets and will operate more than 560 Papa John’s restaurants by 2025.

In June, SHAK expanded its partnership with licensee Maxim’s Caterers Limited to open 10 Shacks in new territories in China by 2031. SHAK is looking forward to expanding its market reach in this fast-growing  market.

Recent Financial Results

For its  fiscal second quarter, ended June 27, 2021, PZZA’s total revenues increased 11.8% year-over-year to $515.01 million. The company’s adjusted operating income came in at $47.97 million for the quarter, up 57.1% from the prior-year period. While its adjusted net income increased 107.1% year-over-year to $32.54 million, its adjusted EPS increased 93.8% to $0.93. As of June 27, 2021, the company had $96.21 million in cash and cash equivalents.

For its fiscal second quarter, ended June 30, 2021, SHAK’s total revenue increased 104.2% year-over-year to $187.46 million. The company’s operating income came in at $3.31 million, versus   $24.08 million loss in the year-ago period. PZZA’s adjusted net income was  $2.38 million, compared to an $18.26 million loss  in the prior-year period. Its adjusted EPS was  $0.05 versus a $0.45 loss per share in the year-ago period. The company had $340.10 million in cash and cash equivalents as of June 30, 2021.

Past and Expected Financial Performance

PZZA’s revenue and EBITDA have grown at CAGRs of 3.4% and 4.9%, respectively, over the past three years. The company’s total assets have grown at a 15.3 % CAGR  over the past three years.

Analysts expect PZZA’s EPS to increase 97.7% year-over-year in the current quarter ending September 30, 2021, 123.1% in the current year, and 11.2% next year. Its revenue is expected to grow 5.4% year-over-year in the current quarter, 11.9% in the current year, and 6.3% next year. The stock’s EPS is expected to grow at a 15% rate over the next five years.

In comparison, over the past three years, SHAK’s revenue and total assets have grown at  CAGRs of 15.8% and 38.7%, respectively. The company’s EBITDA has declined at a 17.1% CAGR  over the past three years.

SHAK’s EPS is expected to remain negative in the  coming quarters of the current year and next year. However, its revenue is expected to grow 51.4% year-over-year in the current quarter, 42% in the current year, and 29.9% next year. Analysts expect the stock’s EPS to decline at an 11.5% CAGR over the next five years.

Profitability

PZZA’s trailing-12-month revenue is almost 3.2 times what SHAK generates. PZZA is also more profitable, with a 10.1% EBITDA margin versus SHAK’s 5.7%.

Also, PZZA’s ROA and ROTC values of 11.5% and 19.8%, respectively, compare with SHAK’s negative values.

Valuation

In terms of non-GAAP forward P/E, PZZA is currently trading at 41.22x, compared to SHAK’s negative 1332.44x.

And, in terms of forward EV/Sales, SHAK’s 4.81x is 86.4% higher than PZZA’s 2.58x.

POWR Ratings

While SHAK has an overall D grade, which translates to Sell in our proprietary POWR Ratings system, PZZA has an overall B grade, equating to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

Both  stocks have C grades for Stability, which is consistent with their slightly higher volatility than the broader market. PZZA has a 1.03 beta, while SHAK’s beta is 1.69.

In terms of Quality, PZZA has been graded a B, which is consistent with its higher-than-industry profitability ratios. PZZA has an 11.1% trailing-12-month ROTC, which is 78.8% higher than the 6.2% industry average. However, SHAK’s C grade for Quality is in sync with its lower profitability ratios compared to its peers. The company has a 5.7% EBITDA margin, which is 54.9% lower than the 12.6% industry average.

Of the 45 stocks in the A-rated Restaurants industry, SHAK is ranked #43, while PZZA is ranked #8.

Beyond what we’ve stated above, our POWR Ratings system has also rated SHAK and PZZA for Value, Momentum, Sentiment, and Growth. Get all SHAK ratings here. Also, click here to see the additional POWR Ratings for PZZA.

The Winner

While the restaurant industry is expected to stay afloat despite the resurgence of COVID-19 cases, we think its higher profitability, lower valuation, and better analyst sentiment make PZZA a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Restaurants industry.

PZZA shares were unchanged in after-hours trading Friday. Year-to-date, PZZA has gained 53.62%, versus a 19.92% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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