Should you buy Papa John’s stock amid takeover rumors?

Papa John’s International Inc (NASDAQ: PZZA) experienced a notable surge in its stock price, rising over 5% on Monday, fueled by speculation of a potential takeover.

This speculation was driven by reports of a jet owned by 3G Capital, a significant investor in Restaurant Brands International (QSR), making a visit to Louisville, Kentucky, where Papa John’s headquarters is located.

This development has sparked interest among investors, especially given Restaurant Brands’ history of acquisitions, including Popeyes and Firehouse Subs.

While no official comments have been made by Papa John’s, the market is abuzz with the possibility of the pizza chain becoming the next big acquisition in the fast-food industry.

Papa John appoints new CEO

In recent leadership developments, Papa John’s appointed Todd Penegor, the former CEO of Wendy’s, as its new CEO and president on August 1, 2024.

Penegor’s appointment comes after a period of interim leadership under Ravi Thanawala, who will continue his role as CFO.

Penegor is expected to bring a fresh strategic direction to the company, focusing on building strong partnerships with franchisees and enhancing the customer experience.

His prior experience at Wendy’s, where he led significant growth initiatives, positions him well to tackle the challenges and opportunities that lie ahead for Papa John’s.

Mixed Q2

The company’s Q2 2024 earnings report, released on August 8, 2024, painted a mixed picture.

Papa John’s reported Non-GAAP EPS of $0.61, beating estimates by $0.08, but revenues of $508 million fell short of expectations by $12.88 million, marking a 1.3% year-over-year decline.

The decrease in revenue was attributed to lower sales in the North American commissary segment, driven by reduced transaction volumes and commodity prices.

However, the company managed to improve its adjusted operating income by 4% to $38 million, thanks to better restaurant-level margins and cost management efforts.

Papa John’s has faced challenges with its comparable sales, particularly in North America, where sales were down 4% year-over-year.

The international segment fared slightly better, with flat comparable sales, but overall, the global system-wide restaurant sales declined by 1%.

The company also closed 31 net units in Q2, including 43 company-owned restaurants in the UK, as part of a strategic international restructuring.

Despite these closures, Papa John’s continues to operate 5,883 restaurants across 49 countries and territories.

Improving restaurant margins

Papa John’s has been focussing on cost management and improving profitability at the restaurant level.

The company has managed to increase its domestic company-owned restaurant margins, contributing to the improved adjusted operating income.

However, the ongoing promotional environment in the quick-service restaurant (QSR) industry and a value-conscious consumer base have posed significant headwinds.

The competitive landscape, with peers like Domino’s and Yum Brands’ Pizza Hut also facing challenges, has made it difficult for Papa John’s to maintain its market share.

The recent weakness in sales has raised concerns about the company’s ability to drive growth in the near term.

However, Papa John’s is actively pursuing strategies to address these challenges.

The company’s Back To Better 2.0 plan, aimed at streamlining operations and enhancing the customer experience, is expected to yield results in the mid-to-long term.

Valuation-wise, Papa John’s stock has become more attractive following a significant decline from its 2021 peak.

The stock’s EV/EBITDA multiple has contracted to around 10x, making it more appealing to value investors.

The company’s solid unit economics, particularly in its franchised operations, and its strategic initiatives to improve margins and drive growth suggest potential upside.

As investors consider the recent developments and the potential for a takeover, the stock’s performance in the near term will likely be influenced by how these factors play out.

With these fundamental aspects in mind, it’s crucial to now examine the technical indicators and price patterns that can provide further insight into Papa John’s stock trajectory.

Let’s delve into the charts to assess the stock’s current position and potential future movements.

Long term downtrend remains, but shorts beware

Papa John’s stock has declined over 65% since peaking above $140 in late 2021.

The stock has been forming lower lows and lower highs since that time which indicates that it remains in a long-term downtrend having fallen 40% this year alone.

Source: TradingView

Investors who want to buy the stock because of today’s takeover rumour can initiate long positions at current levels but must keep a strict stop-loss below the recent swing low near $40.

If the stock falls below that level again, it can fall to much lower levels in a swift move.

Traders who continue to remain bearish on the stock must refrain from shorting it at current levels because if this takeover rumour turns out to be true the stock can witness a massive short squeeze.

Papa John’s is one of the most shorted stocks on the Nasdaq right now with a short interest of 12.27%.