Pizza Stocks at All-Time Highs Ahead of Earnings
Pizza stocks have lifted to new highs, completing historic turnarounds following the first quarter's pandemic swoon. Big players got pummeled at the start of the shutdown, dropping Domino's Pizza Inc. (DPZ) about 28% and rival Papa John's International, Inc. (PZZA) a stomach-churning 58%. Sales data then revealed that Americans stuck at home were eating more tomato pies than at any time in pizza history, triggering vertical rally waves that carved V-shaped patterns back to prior highs.
These issues are better positioned than other restaurant stocks to take advantage of roped-off dine-in sections because pizza has been hand-delivered to customers for more than 130 years. That's when Naples chef Raffaele Esposito was asked to deliver food to King Umberto I and Queen Margherita, who were visiting the city, and she got sick after eating spoiled food. Raffaele personally delivered his latest recipe, which became known as the classic margherita pie.
Competition marks the group's biggest challenge, with public chains competing with thousands of smaller operations. This places mom-and-pop outlets at a disadvantage because they're forced to book sales by listing with competitors at a big delivery hub like Uber Technologies, Inc.'s (UBER) UberEats and Grubhub Inc. (GRUB). Big companies can bypass these middlemen if they choose, building their own delivery fleets and web portals, allowing them to keep down costs and keep a bigger portion of each sale.
Domino's Pizza reports earnings in Thursday's pre-market, with analysts expecting earnings per share (EPS) of $2.25 on $913 million in second quarter 2020 revenue. The stock has been an outstanding performer for many years, posting a long series of new highs. It topped out just above $300 in the third quarter of 2018 and entered a trading range that posted an 18-month low in September 2019. The subsequent uptick reached range resistance in December, ahead of a February breakout that got sold immediately.
Price action filled the 68-point breakout gap in March and set off major sell signals, but the decline then turned on a dime, lifting the stock back to the prior high in April. It consolidated gains into this week and broke out once again, posting an all-time high at $417 on Monday. The on-balance volume (OBV) accumulation-distribution indicator has lifted to a new high as well, offering a stiff tailwind. Even so, the company may need to post strong earnings and a bullish outlook to maintain these lofty levels because relative strength readings have reached extremely overbought levels that triggered reversals in 2016 and 2018.
Papa John's reports earnings on Aug. 4, with analysts expecting EPS of $0.49 on $467 million in second quarter 2020 revenue. The company has had its fair share of ups and downs in recent years, highlighted by a well-publicized scandal that forced the resignation of former CEO and founder John Schnatter. A long-term uptrend topped out in the upper $70s in 2015, yielding a steep pullback, followed by a failed breakout after the 2016 presidential election.
The subsequent downtrend broke range support in 2018, dropping the stock to a four-year low in the upper $30s. It posted two higher lows into the third quarter of 2019 and broke those levels in March 2020, hitting a seven-year low. Aggressive buyers then stepped in, mounting the January 2017 peak above $90 on Monday. OBV has hit a new high as well this week, setting the stage for additional gains in coming weeks.
The Bottom Line
Big pizza chains are trading at new highs after steep first quarter declines, setting a bullish tone heading into second quarter 2020 earnings releases.
Disclosure: The author held shares of Uber in a family account but no positions in the other aforementioned securities at the time of publication.
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