Should Investors Be Grabbing a Slice of Domino’s (DPZ) Stock on the Dip?

With $16 billion in annual revenue and over 18,000 stores globally, Domino’s Pizza, Inc. (DPZ) is one of the largest restaurant chains in the world. Each location operates a delivery and carry out option that leads to the average store ringing the register on $125,000 in sales annually. This kind of revenue growth has been a contributing factor to the stock soaring over 3,272% since 2004.

After reporting Q3 earnings on October 14th, 2021, shares of DPZ plunged more than 5% amid lower-than-anticipated U.S. comparable sales. This was in spite of the fact that the company topped EPS estimates and repurchased 391,007 shares of its common stock during the quarter. 

In this article, I’ll analyze the company’s fundamentals to determine whether the recent dip presents a buying opportunity for investors.   

Industry Outlook

Market Research reports that the global pizza market is projected to expand at a CAGR of 10.17%, reaching $233.26 billion by 2023. This growth is set to be contributed by higher demand for pizza in developing countries, increasing disposable income, and rising youth population. In addition, the increase in pizza franchisees should significantly support market growth as well. I believe that Domino’s business model should allow it to capitalize well on this growth. 

Recent Financial Results

Domino’s Pizza reported mixed third-quarter results, with a 3.1% year-over-year revenue growth to $997.99 million, missing Wall Street revenue projections by $32.01 million. It is worth mentioning that the company collects its U.S. Stores revenues from its wholly-owned stores, advertising contributions, and fees from its U.S. franchised stores. The first thing that concerned investors were the U.S. Stores revenues, which decreased by 4.3% to $108.4 million as of 3Q2021. However, this decrease was partially offset by higher revenues from U.S. franchise royalties, fees, and advertising, leading to a total U.S. Stores revenue of $338.6 million versus a year-ago figure of $339.5 million.   

On the other hand, the company’s third-quarter supply chain revenues increased 2.6% year-over-year to $588.8 million. Its International franchise royalties and fees have also been reported 29.2% higher at $70.6 million compared to the year-ago quarter.

Another factor that sent DPZ lower was their weak U.S. comparable sales, which came in at -1.9% compared to +17.5% a year ago. However, DPZ’s International comparable sales stood at +8.8%, well above consensus and the 3Q2020 figure of + 6.2%.

We can also find some positive signs in its report. For instance, the company’s net income grew 21.5% year-over-year to $120.4 million because of higher global franchise revenue. Net income margin was also improved by 190 bps to 12.1%. These factors led to a Non-GAAP EPS of $3.24, topping analysts’ estimates by $0.14. 

The company plans to reward its shareholders with an annual dividend of $3.76 per share, which translates into a moderate forward yield of 0.81%. However, DPZ will not likely attract a lot of dividend-oriented investors as its dividend yield comes well below the sector’s median threshold of 1.65%.

Analysts’ Estimates & Valuation

Analysts currently have a positive outlook regarding DPZ’s fourth-quarter top and bottom line. Its EPS for the fourth quarter is expected to rise by about 25% YoY, standing at $4.33. The company’s sales for the next quarter should moderately increase by 2.40% YoY to $1.39 billion.

The analysts’ current year average EPS estimate of $13.68 indicates a Forward P/E ratio of around 34x, which is substantially higher than the sector median of 14.84x. Also, its FWD P/S and FWD EV/EBITDA come in at 3.86x and 24.72x versus the sector’s median of 1.25x and 10.25x, respectively. With a relatively conservative revenue growth rate, I think that DPZ’s overvalued condition can contribute additional pressure on its stock. 

The Bottom Line 

While DPZ should benefit from the global pizza market growth in the long term, I remain neutral on this stock for now. Although the company delivered solid international sales and net income numbers in the third quarter, in my view, it’s not enough to justify its extremely high valuations. 

In addition, the post-earnings sell-off was caused by the deterioration of U.S. stores sales, and this trend may continue, considering the expected Q4 sales growth of just 2.4%.

Finally, 10 of 21 analysts covering DPZ stock have established a “Hold” rating.