Have Pizza Shops Fallen Hard as Well?

Watching markets decline on and on, and watching extremely well established companies falling to arguably long-term historical lows on valuation, I decided it was time to get some pizza and a steak and cheese sub given that I am currently in the US and haven't had the real thing in months. Whether its me trying to be overly-"folksy" (sort of the investors version of Sara Palin) or not, I like to think that the thinking and logic behind buying a company's stock should be such that it would also hold for someone looking to buy a local pizza shop from a business broker. Hopefully we can leave the debate as to whether I am merely trying to be folksy for another day...

What hit me today as I was eating a buffalo chicken pizza (a type of food you'll wonderfully only find in the U.S.A.) was that I wondered if the price of buying actual, well established, pizzerias was at a long term historical low, as with many well established companies in the stock market. Obviously the pizza shop is unlikely to have hidden financial landmines like some companies, but there are a lot of listed companies which are very unlikely to have anything of the sort either. Thing is, if I the price of some of my hometown's well established pizza companies had dropped by half in the last few months, I would be very interested to know, and one might suspect that it would be a great opportunity to buy it regardless of a coming recession or not. Now how does this exactly translate into the stock market opportunities of today? Not sure, clearly a lot of listed companies will have uncertainties far harder to understand that those of my local pizza haunt. But you would have to imagine that some battered down listed companies would be compelling in the same manner as my theoretical pizza-shop-at-half-price. At the very least this all makes me want call a local business broker for some pricing... I wonder if the cost of many small businesses has fallen substantially. Perhaps the best investments for all of us might be right around the corner.

Comments

[Glen]

Just stopping by and saying hey. I liked your name "The Stalwart" Did you get that from Lynch?

[Davis Freeberg]

First off, Buffalo pizza is amazing. Good pick. It's too bad more restaurants don't serve it. If you ever visit San Francisco, make sure to try Extreme Pizza's buffalo pizza, it's the best I've ever had, even if they charge way too much.

Secondly, I've got a brother who works for a small pizza restaurant and over the last 2 years they've really been hit hard by the rising flour prices. It seems like a small thing, but I guess it takes a lot of dough to afford the dough these days. I'm not sure that this would be classified as a "landmine", but when you consider that the margins at a restaurant are already slim, you can imagine the impact that something like this could do to your profits.

I can't really speak for the small local parlor or what it's worth, but if you use Papa John's (PZZA) as an indicator it looks like their stock is down 35% since wheat started its run two years ago. Of course a good chunk of the sell off has been in the last month or so, but if you look at their Net income you'll see that they went from making 100 million in 06, to $50 million in 07 and are on pace to make $30 million in 08'. Not shabby for a pizza joint, but not exactly impressive considering that they are bringing in $1.1 billion based on their trailing 12.

[Lee D]

It's a broad malaise. Like Papa John's, Pizza Pizza here in Canada is down by a third, and their lack of growth is dissapointing considering that they acquired Pizza 73 early last year.

Domino's is down by nearly half, I notice.

[The Stalwart (vincent)]

Thanks for the insight. The larger listed cos might be under pressure. But I till wonder how your single, small business, established pizza shop is doing. The one likely around the corner from your house/apartment that has been there for years. And I wonder if you could get it for half the price of what it went for just say a year ago. My thinking is that, well your well established pizza shop isn't unlikely to disappear and while business might be tougher in the near term, in 5 years it will just be the same old well established pizza shop making reliable income. The problem with a listed stock though is that generally there are so many uncertainties. For example, with a Papa John's we just can't be confident in all of their locations, and whether they can all stay in business over the next few years. What's nice with the local pizza shop is that you can feel more confident in its positioning and prospects. Nevertheless, my point is to hint towards the market... many very well established companies are surely getting "cheap", by standard metrics at least, and if one can get enough knowledge and confidence in the staying power of one of them, in a similar fashion to how one can feel confident in the staying power of your favorite pizza spot, then perhaps we are moving into an environment where great opportunities can be found in the market, if we can get as good an understanding of a company's business position as good as one will have in regards to the local pizza ship they have frequented for years. Because the key problem is just uncertainty right now for even the best brands and franchises, and many are hammered down to historical lows (in terms of price or valuation, depending on the company). yet undeniably many of these franchises will survive and keep growing, I might even venture to say that the majority will. So there must be some companies quite oversold right now I feel. The problem is that there are also some which could go bust or run into sever trouble. So perhaps we have a problem akin to the Market for Lemons as Joe is fond of referencing. Surely most well established companies will survive this, but at the same time when we try and pick stocks the problem is that we could pick incorrectly and see our company fall substantially, perhaps even go bankrupt. Big Winners and Big Losers are currently available in the market, the challenge is to choose wisely.

[Lee D]

Stalwart Vincent, I would think that it greatly depends on the situation in a given locale, and that if an independant owner is selling a well established pizza place in the current climate, a prospective buyer would have to be confident that he can ride out the trouble until things get better.

Around here, pizza joints with a long history not only have strong branding and customer loyalty, they've also got revenue from both liquor and VLT's in the bars and lounges adjacent to their restaurants. So unlike delivery-only national chains, they're running an integrated restaurant/bar biz with more revenue sources than just pizza delivery.

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Here’s our market view on American stock market for 13th October, 2008

You all know my opinion - we have the characteristics of at least "a" bottom. Look at the scoreboard - Dow and S&P 500 down 18% last week, in only a week. If that doesn't show irrational dumping the only other environment that probably would is an official end of the world pronouncement from on high.

The VIX Index (69.96) soared to a record high; bears at extreme high levels, bulls no where to be found; valuation levels the best since Black Monday, October 19, 1987. And back then you could buy AAA long term munis yielding 10% or better vs. around 4.75% today.

No one can call bottom in advance with confidence, but we can correctly report that the conditions for at least a bounce are in place, assuming we are not headed for a 1929 depression.

We are not, but don't take my word on this. Last Tuesday, Oct. 7, Gary Becker the 1992 Nobel economic laureate, professor of economics at the University of Chicago stated in the Wall Street Journal - "we're not headed for a depression."

He states, "World economic growth will recover once we are over the present severe difficulty." Also he states, "Although it is the most severe financial crisis since the Great Depression of the 1930's it is a far smaller crisis, especially in terms of the effects on output and employment."

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Personally I know a man that tried to start a pizza shop and it failed miserably (one million dollars later) - I don't think that restaurants and recreation are something to invest in right now. Do you think the economy will pick back up soon?

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