PAPA JOHNS INTERNATIONAL INC (PZZA) stock intrinsic value fair value estimate & owner earnings analysis

Papa John's franchises and operates pizza delivery and carryout restaurants. At the end of 2025 there were 6,083 restaurants in 50 countries and territories, of which 5,608 were franchised. The company earns a royalty of about 5% of franchisee sales (about 3% from sub-franchisees under international master agreements) and a margin on the dough and ingredients its commissaries supply to North American stores. It also runs 475 company-owned restaurants. Franchisees pay for most new store building, so the company needs little capital to grow units. Earning power. We measure owner earnings as operating cash flow less normal working-capital swings, stock compensation and the capital spending needed to keep the business as it is. Before lenders are paid, Papa John's produced about $105 million in 2022, $108 million in 2023, $100 million in 2024 and $103 million in 2025, or about $3.10 to $3.30 per share. We anchor on the 2022-2025 median of about $104 million. We leave out 2018-2019, when the founder controversy cut this figure to about $37-46 million, and 2020-2021, when pandemic delivery demand lifted it to $85-130 million. Neither period describes today's business, though we use the 2018-2019 episode in the bear case. Owner earnings rose about 3% in 2025, but 2026 is clearly worse. In the second quarter of 2026, North American comparable sales fell 8.3% and revenue fell 8.8% to $482 million. The company lowered its full-year outlook to North American comparable sales down 6-8%. First-half operating cash flow was $35.8 million, against $66.8 million a year earlier. The board suspended the quarterly dividend from the third quarter of 2026. International comparable sales rose 1.5%, a seventh straight quarter of growth. In the second quarter the system closed 92 restaurants and opened 50. Debt. At June 28, 2026 the company owed about $733 million in borrowings: $400 million of 3.875% notes due September 2029, plus a term loan and a revolving credit line maturing March 2030. It also had about $38 million of finance leases and about $12 million of outside owners' interests in partly owned subsidiaries, for $783 million in total. The notes cost less than the long-run rate we use until they mature, which is worth about $23 million, so we deduct about $760 million. The credit agreement caps debt at 5.25 times cash earnings. The company reported 3.2 times at the end of 2025. Base case: about $20.13 per share. We assume 2026 cash earnings before interest of about $75 million, a 27% fall consistent with the first-half cash flow and the lowered outlook. They then recover over four years to about $96 million, below the prior normal of $104 million, because the North American store base is shrinking and comparable sales are negative. After that they decline slowly, about 1% a year. We credit no unit growth. International openings continue, but recent closures have offset them, with net system growth of only 53 units in 2025 and a net decline in the latest four quarters. The business is worth about $1,426 million, the debt about $760 million, which leaves about $666 million for shareholders. Bear case: about -$0.02 per share. The template is the company's own 2018-2019 crisis, when cash earnings before interest fell by more than 60%. We assume 2026 at $65 million, then two years near $45 million, and only a partial recovery to $70 million, followed by a decline of about 3% a year. At $45 million, earnings barely cover roughly $40 million of interest. Debt would exceed the 5.25-times covenant, and the 2029 notes and 2030 bank debt would be refinanced at much higher rates, which adds about $109 million of cost. The business is worth about $869 million and owes about $870 million, so shareholders are left with essentially nothing. In this case the company owes roughly what it is worth. Bull case: about $31.68 per share. The current store closures and supply-chain work restore cash earnings to about $90 million in 2026 and $105-112 million later, around the 2022-2025 level, with modest gains from steady international openings and nothing lost after year ten. The business is worth about $1,808 million, about $1,048 million after debt. Margin-of-safety price: $9. The earnings level from 2022 to 2025 is well documented, but the current decline is steep, and it is not yet clear where it ends. The plausible worst case is that the brand keeps losing North American customers to discounting rivals while the debt comes due in 2029-2030. With debt at about seven and a half times today's annual cash earnings, the bear case leaves shareholders with nothing. If 2026 is a trough rather than a new level, and the business recovers only to about $96 million, the shares are worth about $20. If recovery stalls at today's roughly $75 million, the debt absorbs most of the value. With the dividend suspended, the business pays nothing while the turnaround plays out. The price assumes a four-year holding period. From $9, the base case implies roughly 30% a year over four years and about 24% over five, and the bull case implies more. The bear case implies a loss of most or all of the investment. Because that downside is real, the price sits well below the base-case value. Other notes. After an 18-month review that considered a sale, the board said in August 2026 that it would pursue its own transformation plan. A takeover offer had been reported earlier in 2026, but no transaction exists, and none is included in these values. The previous estimates were made on a different basis and are not comparable.