Papa John's investors will be disappointed in the near term as sales struggle, according to one Wall Street analyst.
Stifel's Chris O'Cull downgraded the stock to sell from hold on Monday and wrote that the company's recent promotions suggest the embattled pizza maker is struggling to compete for customers in the face of low-price deals at rivals Dominos, Pizza Hut and Little Caesars. For the restaurant chain to bolster sales, the analyst believes it will need to commit to subsidizing franchisees, a direct threat to earnings over the next few years.
"In order for Papa John's to drive transactions we believe it will need to commit to an everyday low price menu that will probably hurt franchisees' profits until consumer perception of its value changes," O'Cull wrote. "These offers are clearly designed to drive transactions, but to be successful they must increase transactions enough to offset the dollar impact of the discount, otherwise the results lower store margin percentage and dollars."
Stifel reduced its 2019 earnings per share estimate to 80 cents from $1.20 — well below the Wall Street consensus estimate of $1.19 — and cut its price target for the stock to $35. The new price target represents 22 percent downside from Friday's close of $45.26.
Papa John's stock fell 4.3 percent Tuesday to close at $43.31.
The downgrade comes about two weeks after the company announced a $200 million investment by activist hedge fund Starboard Value. Papa John's said Starboard CEO Jeffrey Smith will become its chairman following the fund's investment in the form of a convertible stock purchase of 11 to 15 percent.
Activist investors typically accumulate stakes in companies they believe are undervalued and encourage executives to adopt changes they think will boost returns for shareholders. Such demands can range from board seats and CEO replacement to an entire sale of the business.
Papa John's stock was unchanged in premarket trading Tuesday.