Stifel Downgrades Papa John's To Sell Amid 'Fraternal Corporate Culture'

Papa John's Int'l, Inc. (NASDAQ: PZZA) has a major problem on its hands as a "fraternal corporate culture" hurts the prospect of any notable turnaround or buyout, according to Stifel.

The Analyst

Stifel's Chris O'Cull downgraded Papa John's from Hold to Sell with a price target lowered from $50 to $38.

The Thesis

Papa John's toxic culture led by recently-ousted CEO and founder John Schnatter was highlighted by a Forbes report and isn't the only issue facing the pizza delivery chain, O'Cull said in a note.

The sentiment towards Papa John's is "extremely negative" based on social media comments and checks, which suggests same-restaurant-sales have fallen over the past few days.

The company's problems stem at the corporate level and may imply franchisees will demand some form of financial support or initiate legal action, the analyst wrote. In fact, the average franchisee's annual store cash flow is likely to fall from $95,000 in 2016 to roughly $60,000 this year and failure to provide financial assistance could result in store closures.

O'Cull said a potential takeout of Papa John's "seems futile" at this point given the extent of brand damage. While a deal can still in theory be achieved at a good price for a buyer, simply proclaiming "the proverbial under new ownership banner" could backfire and the new owner would still be responsible for any lawsuit from franchisees.

Many of the company's shareholders are event-driven funds who are expecting a takeout to be the ultimate outcome, but the analyst said it's difficult to imagine a scenario where the company is bought at a premium to current levels.

Price Action

Shares of Papa John's hit a new 52-week low of $47.29 Monday morning and was down by more than 6.5 percent on the day. The board of directors said Monday it approved a "poison pill" provision, aimed at preventing Schnatter from gaining more control of the company.

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