“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, May 25, 2020

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Option Trade – Papa John's International, Inc. (NASDAQ: PZZA) Calls

Thursday, May 28, 2020

** OPTION TRADE: Buy PZZA OCT 16 2020 85.000 CALLS at approximately $6.30 (Up to $7.00).

Place a pre-determined sell at $12.60.

Also include a protective stop loss of $2.55.

Preamble.....

Pizza chains are profiting from the impact of COVID-19 whilst the rest of the industry suffers. And Papa John's International, Inc. (NASDAQ: PZZA) is definitely doing well the past couple of months.

Papa John’s reported same-store sales in North America surged 33.5% during the month of May, up from 26.9% in April, according to a business update released by the company Wednesday.

“In May, for the second straight month, Papa John’s team members and franchisees delivered the best sales period in the company’s history,” Papa John’s CEO Rob Lynch said in a statement. “We entered the pandemic with strong growth and momentum, and are fortunate that our delivery and carry-out model has enabled us to meet an essential need for high quality food, safely delivered to consumers’ homes.”

Even though May was much better than April, April was the best month in PZZA’s history, and now May has surpassed this.

Papa John’s International Inc. says its pizzas and new Papadia flatbreads were flying out of its kitchens during the month of April, driving record sales for the month.

April was the best month in the company’s history,” Papa John’s PZZA, Chief Executive Rob Lynch said after the company reported first-quarter earnings early Wednesday, May 06. Papa John’s has been around for about 35 years.

“Companies providing special services like delivery will persevere and do very well. Texas and Georgia are starting to reopen but we’re continuing to see customer demand for delivery at home.”

Lynch said there was a business slowdown in March as large gatherings and sporting events, like the NCAA basketball tournament were canceled. Pantry-loading, in which customers stocked up at grocery stores rather than eating out, also took a toll on sales.

But by April, customers were looking outside the home for meals.

And now May sales blossom even more!

May Sales Growth.....

May was the second straight month the pizza maker reported the "best sales period" in company history. 

And Papa John's says it will continue to provide updates during the pandemic.

International sales in May rose 7% from 1.4% growth in April. Of Papa John’s 2,100 international franchised stores, roughly 320 are still temporarily closed due to the pandemic.

“Papa John's disclosed another record-setting month in May, with Period 5 domestic comps up 33.5%, implying significant upside to current Street projections and illustrating the continued strength of both the underlying momentum generated by recent product launches and the pandemic's impact on consumers' off-premise usage,” Stifel analyst Chris O’Cull wrote in a note Wednesday. “We believe the company will be able to sustain these guest visits with a robust product innovation pipeline.”

The company's no-contact delivery system and new products are helping drive sales, according to Lynch. 

Earnings…..

Reporting on its first quarter of 2020 yesterday, Papa John's revealed positive growth, earnings per share (EPS), and revenue figures compared to Q1 2019's negative metrics. However, with the economic damage imposed on the U.S. economy in general and the restaurant industry in particular in March, its performance fell short of consensus analyst estimates.

The pizza chain outdid its previous-year quarterly results with diluted $0.15 EPS, compared to 2019's negative $0.12 EPS, reflecting net income of $8.4 million this year and a net loss of $1.7 million last year. Analysts had forecast $0.39 EPS for Q1 2020, however. Instead of the expected $413 million in total revenue, the company delivered $409.8 million.

Globally, restaurant sales grew 5.3% in Q1 2020, rather than shrinking 5.5% as it had in 2019. In North America, company-owned restaurants saw comparable sales expand 6.1% and franchisees enjoyed 5.1% growth, once again reversing previous-year sales losses.

Providing a preliminary look at April, Papa John's indicates that comparable sales grew explosively in the U.S., skyrocketing 26.9%. International sales remained far weaker but still climbed a little, growing an estimated 1.4%. The company states the reason for these soaring sales is that "unprecedented numbers of families are relying on Papa John's" and remarks it is "rising to this challenge."

The enterprise reports that it has enough cash on hand for its needs, with backup in the form of $350 million in revolving credit, which it has not yet drawn down. CEO Robert Lynch stated during the follow-up earnings conference call that the company attracted in excess of 1 million new customers during April.

Moving Forward…..

Papa John's expected earnings growth rate for the current quarter and year is 53.6% and 23.1%, respectively. For the next year, the company’s expected earnings growth rate is 29.2%.

Analysts Reactions.....

Stifel rates Papa John’s stock buy with a $95 price target, up from $80.

“The pizza segment has been better positioned than most throughout this crisis and Papa John’s performance is clear evidence of that fact as sales trends continue to accelerate,” wrote MKM Partners analysts.

“The focus is clearly on driving top-line and franchisee’s profitability, in these trying times, as there have been many behind-the-scenes moves we believe are contributing to the results, including the decision to re-invest half of the profit growth into its business (benefits, wages, restaurants, supply chain).”

MKM Partners rates Papa John’s stock neutral with a $72 price target, up from $70.

“While we recognize some investors may balk at the valuation, we believe the brand is still in the early stages of a turnaround and has yet to benefit from menu innovation, expanded digital reach, accelerating unit development and eventual refranchising of company-owned units,” wrote BTIG analysts in a note.

“While we recognize the sales acceleration in April of 26.9% is attributable to stay-at-home orders and likely unsustainable, we expect the concept to maintain a significant portion of the gains once the environment normalizes.”

BTIG rates Papa John’s stock buy with an $85 price target.      

Overall, the Street has a cautiously optimistic outlook on the stock. Analysts are evenly divided between 6 Buys and 6 Holds adding up to a Moderate Buy consensus.

So…..

Rob Lynch said the pizza joint already had a tailwind behind it before the coronavirus outbreak, but the nationwide lockdown orders accelerated its growth as it innovated to meet the challenges of the crisis.

"The success of 'No Contact Delivery' and new products like Papadias -- both examples of a new culture of innovation at Papa John's -- continue to drive results," Lynch said in a statement.

Shares of Papa John’s soared 20% this year. The value of the stock has more than doubled since mid-March as demand for pizza delivery accelerated during stay-at-home orders tied to the coronavirus pandemic.


Option Trade – Verizon Communications Inc. (NYSE:VZ) Calls

Wednesday, May 27, 2020

** OPTION TRADE: Buy VZ OCT 16 2020 55.000 CALLS at approximately $2.25 (Up to $2.40).

Place a pre-determined sell at $4.50.

Also include a protective stop loss of $0.90.

Preamble.....

To date, Verizon Communications Inc. (NYSE:VZ) is one of only three companies that has constructed a 5G nationwide wireless network within the U.S. Analysts anticipate high demand for 5G, and each company has spent tens of billions in capital expenditures on this undertaking.

Despite worldwide mayhem induced by the coronavirus pandemic, the U.S.’s largest wireless company Verizon, which has a mainly domestically oriented business that doesn’t rely on in-person transactions, started 2020 on a positive note, reporting relatively healthy first-quarter 2020 results primarily led by the wireless business. With industry-leading wireless products and services, the company remains well poised to benefit from increased 5G deployment across the country under the new operational framework.

2020 could be a good year for Verizon, as the telecom stock may benefit from increased activity levels by consumers who are bored and staying at home, using the internet to look for ways to entertain themselves.

Despite some near-term negativity, Verizon will play a major role in the 5G future. Plus, Verizon hasn’t taken on a ton of debt to fuel expansion into new industries like rival AT&T T and was already focused on various cost-cutting measures before the pandemic. Meanwhile, Verizon stock has outpaced its industry’s average over the past 12 months and is up 16% over the last two years, which tops the S&P 500’s 5% expansion.

Earnings…..

Verizon reported earnings on April 24,2020. The telecom powerhouse did see its revenue dip 1.6%, as the pandemic impacted its core wireless business. VZ also lowered its profit guidance and pulled its revenue outlook amid the uncertainty. And Verizon raised its bad-debt reserve to help account for customers who won’t be able to pay their bills.

Verizon noted that about 70% of its retail stores have closed due to COVID-19, and that's had a negative effect on consumer activity as operating revenue declined 1.6% from the prior-year quarter. But the company still reported a healthy profit of $4.3 billion, which was 14% of the $31.6 billion in revenue that it brought in during the quarter.

For full-year 2020, Verizon tweaked its earlier guidance amid the coronavirus-led turmoil. Adjusted earnings per share are currently anticipated to remain within -2% and 2%, compared with earlier expectations of 2-4% increase year over year. The company, however, withdrew its revenues guidance. Capital expenditures for 2020 are likely to be in the range of $17.5 billion to $18.5 billion.

Moving Forward…..

VZ’s numbers could get stronger as the rollout of its 5G wireless network continues to be an attractive growth opportunity for the company. Verizon expects it will lead to more throughputs on its network. In its earnings release, the telecom giant said that it's launched its 5G Ultra Wideband Network in 34 markets across the U.S. thus far as it continues to build the network.

With people, businesses, and devices utilizing the network, this should continue to generate revenue for the telecom stock. Moreover, all of its competitors face massive capital expenditures to build their networks. This should give Verizon and its peers considerable power within the marketplace. Furthermore, the high cost of building these networks also makes the kind of price war that T-Mobile initiated in the 3G and 4G eras less likely. This should help Verizon boost company profits over time.

Its market power could also help Verizon in one key area: debt reduction.

Standout Company…..

Where Verizon may stand out is on speed and coverage. The company took an early lead in launching the first 5G networks. In January, it also set a goal of launching four times as many 5G-compatible devices on its network this year. How the COVID-19 pandemic will impact that goal remains unclear, though the company said that 5G construction remained on schedule.

Also, the company likes to remind prospective customers that it offers the most extensive nationwide network, as well as its No. 1 ratings from the likes of J.D. Power, Nielsen, and Opensignal. Time will tell if it maintains that designation as 5G matures.

Analysts Reactions.....

Royal Bank of Canada reaffirmed a “hold” rating on shares of Verizon Communications in a research note on Monday, April 27th.

Several other equities analysts have recently commented on the company…..

  • Oppenheimer assumed coverage on shares of Verizon Communications in a report on Friday, April 24th. They issued a “buy” rating and a $70.00 target price for the company.
  • Credit Suisse Group decreased their target price on shares of Verizon Communications from $65.00 to $61.00 and set a “neutral” rating for the company in a report on Monday, April 6th.
  • Barclays reiterated a “hold” rating and issued a $54.00 target price on shares of Verizon Communications in a report on Friday, April 17th.
  • Finally, Nomura Securities decreased their target price on shares of Verizon Communications from $65.00 to $61.00 and set a “neutral” rating for the company in a report on Monday, March 30th.

One investment analyst has rated the stock with a sell rating, sixteen have issued a hold rating, six have assigned a buy rating and one has issued a strong buy rating to the company’s stock. The company currently has a consensus rating of “Hold” and an average target price of $61.44.

So…..

It is likely that Verizon will remain both a growth and an income play for years to come.

With one of the most efficient wireless networks in the United States, Verizon is likely to benefit immensely from the increase in 5G footprint with the launch of the 5G Ultra Wideband network in more markets across the country. The company is taking pro-active steps for the overall benefit of its employees and users while implementing efficient cost measures to tide over the storm.

Verizon has a debt-to-equity ratio of 2.02, a quick ratio of 0.95 and a current ratio of 0.99. The firm has a market capitalization of $226.64 billion, a price-to-earnings ratio of 12.39, and a P/E/G ratio of 3.63 and a beta of 0.48. The business’s 50-day simple moving average is $56.53 and its 200 day simple moving average is $58.01. Verizon Communications Inc. has a twelve month low of $48.84 and a twelve month high of $62.22.