Over the last six months, Papa John's shares have sunk to $46.12, producing a disappointing 10.8% loss - worse than the S&P 500’s 1.7% drop. This may have investors wondering how to approach the situation.

Is now the time to buy Papa John's, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Even though the stock has become cheaper, we don't have much confidence in Papa John's. Here are three reasons why we avoid PZZA and a stock we'd rather own.

Why Is Papa John's Not Exciting?

Founded by the eclectic John “Papa John” Schnatter, Papa John’s (NASDAQ:PZZA) is a globally recognized pizza delivery and carryout chain known for “better ingredients” and “better pizza”.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales show the change in sales at restaurants open for at least a year. This is a key performance indicator because it measures organic growth.

Papa John’s demand has been shrinking over the last two years as its same-store sales have averaged 1.6% annual declines.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Papa John’s revenue to rise by 1.9%, a deceleration versus its 4.9% annualized growth for the past five years. This projection doesn't excite us and indicates its menu offerings will see some demand headwinds.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Papa John’s margin dropped by 3.8 percentage points over the last year. This decrease came from the higher costs associated with opening more restaurants.

Final Judgment

Papa John's isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 19.3× forward price-to-earnings (or $46.12 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Papa John's

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