Papa John's International, Inc. (PZZA) rode the food delivery craze in the first three quarters of 2020, breaking out above 2016 resistance and posting an all-time high at $103.25. It fell more than 25% into November, finding support at the 200-day exponential moving average (EMA), and has recouped about half of those losses into January. Long-term cycles are now crossing into bull mode, predicting that the fast food chain will challenge and potentially break the 2020 high.

Key Takeaways

  • Papa John's stock has finally shaken off the damage done by founder John Schnatter.
  • The stock hit an all-time high above $100 in September.
  • An intermediate correction shed 25% into November.
  • Relative strength cycles now predict a test of the 2020 high and potential breakout.

Pizza is a tough business, with competition and fickle taste buds separating winners from losers. Yum! Brands, Inc.'s (YUM) Pizza Hut division learned this the hard way, failing to grow in recent years despite huge success at Taco Bell and KFC. Papa John's faces unique headwinds in addition to industry challenges, triggered by the departure of founder John Schnatter after his 2017 racist remarks. However, customers have now returned, allowing the chain to resume sports partnerships.

Longbow analyst Alton Stump just chose Papa John's stock as his "Top Restaurant Pick for 2021," noting, "We expect Papa John's to accelerate its innovation pipeline, which could equate to an even greater same-store sales lift from new products than last year … 2021 innovation will likely include an expanded and/or upgraded wings platform, additional Papadias flavor offerings, and potentially new categories such as salads. We are currently modeling 8.0% NA system-wide same-store sales growth for Papa John's in 2021, well ahead of consensus at up 1.4%."

Just six analysts cover the stock, but all of them have posted "Buy" ratings. Price targets currently range from a low of $91 to a Street-high $115, while the stock is set to open Wednesday's session about $1 below the low target. This humble placement should support upside through the first quarter, or at least into the Feb. 24 earnings release, when the company is expected to post a profit of $0.47 per share on $465.09 million in revenue.

Same-store sales statistics provide a performance comparison for the established stores of a retail chain over a given time period, such as a fiscal year or quarter or a calendar year or quarter, comparing revenues for the current period to the same period in the past – for example, comparing first quarter 2020 revenues to first quarter 2019 revenues.

Papa John's Weekly Chart (2015 – 2020)

Chart showing the share price performance of Papa John's International, Inc. (PZZA)
TradingView.com

A multi-year uptrend stalled near $80 in the third quarter of 2015, giving way to a steep decline that found support in February 2016. The subsequent recovery wave reached the prior high in August, ahead of a November breakout that failed in June 2017, at the start of the Schnatter controversy. The selloff broke 2016 support in the summer of 2018 before bottoming out at a five-year low in the mid-$30s.

Buyers returned after a 2019 support test, lifting the stock to a two-year high in February 2020. It broke 2018 support in the pandemic decline and turned sharply higher, completing a round trip into the first quarter peak in April. The subsequent breakout attracted exceptionally strong buying interest that culminated in a buying spike above 2016 resistance in July. That impulse failed in September, yielding an intermediate correction that held 200-day EMA support.

The bounce into 2021 has reached the underside of the failed breakout, suggesting a short-term increase in selling pressure. Conversely, a rally above $91.18 would set off buying signals, favoring a rapid advance into the September high. The monthly stochastic oscillator has just flipped into a buy cycle, while the weekly has turned in the opposite direction, telling bulls to be patient, expecting a positive outcome after two-sided price action.

A failed breakout occurs when a price moves through an identified level of support or resistance but does not have enough momentum to maintain its direction. Since some traders look to establish positions when a breakout occurs, they may opt to close those trades if the breakout fails.

The Bottom Line

Papa John's has bottomed out after an intermediate correction and could hit new highs in coming months.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.