We think that Domino’s Pizza Inc. (DPZ) is better positioned than most competitors during the pandemic, given its strong brand and emphasis on online ordering, explains John Staszak, an analyst with Argus Research — a leading independent Wall Street research firm.
Domino’s is primarily a franchise operation that derives revenue from fees and the sale of materials to franchisees. The company also directly owns almost 600 stores and uses them as a base for testing menu changes and as a pool for franchise liquidity. The company has operations in 80 countries.
Domino’s has been spending aggressively on its e-commerce platform, and e-commerce sales now account for more than 70% of U.S. revenue. Given the growing popularity of online ordering, we believe that ease-of-use will be a priority for consumers and expect Domino’s carryout and delivery businesses to benefit.
Management thinks it is particularly important to make ordering, carryout and deliveries easy. We think management is avoiding the use of third-party delivery services in order to maintain strong customer relationships and enhance profitability. We also expect product innovations going forward, and believe that these will strengthen customer loyalty.
We also like the company’s stable comps and strong store-level cash flows, which are much higher than those of other franchisees. We think that Domino’s can continue to grow and gain market share in a fragmented market (i.e., mom and pop pizzerias) more rapidly than its current valuation suggests.
We also expect the company to grow through new store openings in the U.S. and internationally. As such, we are raising our 2021 estimate to $13.34 from $13.30 and increasing our 2022 EPS estimate to $15.10 from $15.00.
The shares are trading at 31.5-times our revised 2022 (when we see a full year of recovery in the restaurant industry) estimate, below the industry average of 32. Since the company’s IPO in July 2004, they have traded at an average multiple of 28.7. The price/sales ratio of 4.2 and the price/cash flow multiple of 13.2 are consistent with peer averages.
As such, we are maintaining our "buy" rating and raising our target price to $540 from $515. At current prices, our target, if achieved, offer investors the prospect of a more than 14% total return.
