Are Shares of Domino’s Pizza Worth Buying Under $400?

Domino’s Pizza (DPZ) fell short of the earnings expectations for the third quarter, but it still has enough upside left with the beginning of the holiday season, as reflected by its solid growth momentum and favorable analyst sentiment. 

Founded in 1960, Domino's Pizza Inc. (DPZ) is the largest pizza company in the world based on global retail sales. It operates through three segments, namely U.S. Stores, International Franchise, and Supply Chain. The company demonstrated impressive performance during the pandemic, primarily because of its well-established online ordering and delivery system.

DPZ is well-positioned to soar beyond its 33.1% year-to-date returns ahead of the holiday season. Halloween, Super Bowl Sunday, Thanksgiving Eve, and New Year’s Day are some of the busiest days for DPZ. It typically sells nearly 2 million pizzas on Super Bowl Sunday which is about 40% more than the sale on a normal Sunday. This impressive performance and the potential upside based on several factors have helped it earn a “Buy” rating in our proprietary rating system.

Here is how our proprietary POWR Ratings system evaluates DPZ:

Trade Grade: A

DPZ is currently trading above its 200-day moving average of $383.45, but below its 50-day moving average of $407.64, indicating an uptrend in the stock. Moreover, DPZ has gained 13.8% over the past six months, which reflects short-term bullishness.

DPZ’s total revenues increased 17.9% year-over-year to $967.72 million in the third quarter ended September 30, 2020. This growth can be attributed to a 14.4% year-over-year increase in DPZ’s global retail sales, and 17.5% year-over-year growth in its US same-store sales. EPS rose 21.5% from the same period last year to $2.49, while net income grew 14.8% from the year-ago value to $12.80 million.

DPZ opened 209 gross new stores and 83 net new stores in this quarter. DPZ also opened its first store in Croatia in August. Earlier this year, Dash brands invested $40 million in Domino’s Pizza in China, in exchange to acquire a controlling stake in the company. Given China’s population, this partnership can help DPZ become a leading fast-food restaurant chain in the country. Dash is expected to invest another $40 million in DPZ in the first quarter of 2021.

Buy & Hold Grade: B

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, DPZ is well-positioned. The stock is currently trading just 11.4% below its 52-week high of $435.58, which it hit on October 5th.

Looking at the past three years, the stock has grown 90% due to its strong fundamentals, its ability to adapt quickly to the market demands, and an increase in the number of its stores in the United States and internationally. DPZ’s revenue and EPS grew at a CAGR of 12.9% and 30.6%, respectively, over the past three years. DPZ’s dominating market presence and economies of scale have allowed it to grow substantially over the past three years. 

Peer Grade: B

DPZ is currently ranked #3 out of 49 stocks in the Restaurants industry. Other popular stocks in the restaurant group are McDonald's Corporation (MCD), Starbucks Corporation (SBUX), and Dunkin' Brands Group, Inc. (DNKN).

MCD, SBUX, and DNKN gained 16%, 4.2% and 12.9% year-to-date, respectively, versus DPZ’s 33.1% returns over this period.

Industry Rank: A

DPZ is part of the Restaurants industry, which is ranked #22 out of the 123 industries. With the onset of the pandemic, restaurants offering dine-in services were hard hit, but they have been adapting to the “new normal” with more focus on delivery services and providing incentives to go digital with innovative menus. Over time, the restaurants offering delivery services have been thriving with the people avoiding dining in restaurants and preferring to order at home.

Overall POWR Rating: B (Buy)

DPZ is rated “Buy” due to its short-and-long-term bullishness, impressive past performance, and solid growth prospects, as determined by the four components of our overall POWR Rating.

Bottom Line

DPZ has the potential to soar in the upcoming months despite gaining 33.1% so far this year, based on its continued business growth potential, favorable earnings and revenue outlook, and strong financials.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is pretty impressive for DPZ. It has an average broker rating of 1.43, indicating a favorable analyst sentiment. Out of 25 Wall Street analysts that rated the stock, 16 rated it “Strong Buy.” The consensus EPS estimate of $3.87 for the fourth quarter ending December 2020 indicates a 23.6% improvement year-over-year. Moreover, DPZ has an impressive earnings surprise history, as it beat the street EPS estimates in three out of trailing four quarters. The consensus revenue estimate of $1.37 billion for the current quarter indicates a 19.1% growth from the same period last year. Its EPS is expected to grow at 14.8% per annum over the next five years. This outlook should keep DPZ’s price momentum alive in the near term.  

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DPZ shares fell $0.03 (-0.01%) in after-hours trading Monday. Year-to-date, DPZ has gained 34.48%, versus a 11.07% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.


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