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Domino's (DPZ) Rises 39% in 6 Months: More Room to Run?

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Domino's Pizza, Inc. (DPZ - Free Report) is gaining momentum backed by solid earnings surprise history, international expansion, same-store sales growth, digital initiatives and franchising strategy. In the past six months, the stock has gained 38.7%, outperforming the industry’s increase of 1.7%. However, high costs and debt remain major concerns. Let’s delve deeper.

Hidden Catalyst

Domino's earnings and revenues have surpassed the Zacks Consensus Estimate in seven out of the trailing eight quarters. In first-quarter 2018, the company’s adjusted earnings came in at $2.00 per share, which outpaced the consensus mark of $1.77 and increased 58.7% on a year-over-year basis. Also, its second-quarter and 2018 earnings estimates have moved up by 0.6% and 3.3%, respectively, over the last 30 days. This testifies the unwavering confidence of analysts.

The company’s operational advantages, given its market share and scale, along with consistent focus on innovation, execution of growth strategy and digital initiatives should drive its performance in the quarters ahead.

Since Domino’s earns a chunk of its revenues from outside the United States, the company remains committed toward accelerating its presence in high-growth international markets to boost business. In fact, the company’s international growth continues to be strong and diversified across markets on the back of exceptional unit level economics.

In the first quarter of 2018, Domino’s marked the 97th consecutive quarter of positive same-store sales in its international business. Notably, its all four geographic regions reported positive comps, with Americas and Asia-Pacific gaining the most. The company opened 829 net new stores in international markets in 2017 and 79 net stores in first-quarter 2018. Domestically, Domino’s posted the 28th consecutive quarter of positive same-store-sales in the same period.

In addition, this Zacks Rank #3 (Hold) company has a wide franchise network, both domestically and internationally. Reducing its ownership of restaurants and focusing more on re-franchising minimizes the company’s capital requirements and facilitates earnings per share growth and ROE expansion. Moreover, free cash flow continues to grow, thus allowing reinvestment for increasing brand recognition and shareholder return. In fact, the company has increased its dividend by 25%, 24%, 23%, 21% and 20% in 2014, 2015, 2016, 2017 and 2018, respectively, after initiating regular dividends in 2013. Domino’s also remains less affected by food inflation as a result of franchising compared to other pizza companies with global operations.

 

Concerns

Domino’s has undertaken a number of sales building efforts like re-imaging of restaurants and  implementation of technology. Performance-based incentives and compensation along with higher advertising expenses are also resulting in higher costs. The Affordable Care Act, commonly known as Obamacare, might continue to have an adverse impact on restaurant operators. The Affordable Care Act requires employers to extend health benefits. Furthermore, the company’s high debt is a concern for investors. Long-term debt at the end of quarter was $3,117.2 million, up from $3,121.5 million as of Dec 31, 2017.

In the past five years, Domino’s has significantly outperformed the Retail-Restaurants industry. Its valuation also looks a bit stretched when compared with its own range as well as the industry average. Looking at the company’s price-to-earnings (P/E) ratio, which is one of the most commonly used valuation ratio and is best suited for evaluating restaurants, investors might not want to pay any further premium. The company currently has a trailing 12-month P/E ratio of 37.76, which below its high of 46.77 in the last five years. Additionally, the stock is quite overvalued right now compared with its peers as the industry’s average over the past five years is 24.56.

Key Picks

Some better-ranked stocks in the same space are Wingstop Inc. (WING - Free Report) , Dine Brands Global, Inc. (DIN - Free Report) and Denny's Corporation (DENN - Free Report) . Wingstop sports a Zacks Rank #1 (Strong Buy), whereas Dine Brands and Denny's carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop has an impressive long-term earnings growth rate of 19.5%.

Dine Brands Global has reported better-than-expected earnings in the trailing four quarters, with an average beat of 7.8%.

Denny's has reported better-than-expected earnings in the preceding two quarters.

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