We are upgrading Domino’s Pizza (DPZ) to “Buy” from “Hold” with a target price of $530. Our upgrade reflects the company’s economies of scale, early entry into the pizza delivery business, and prospects for growth in international and domestic markets, explains John Staszak, analyst at Argus Research.

Domino’s reported 4Q23 and 2023 results on Feb. 26. Revenue rose 0.8% from the prior year to $1.4 billion and missed the consensus of $1.42 billion. US same-store sales were up 2.8%, compared to a 90-basis-point increase in 4Q22. The consensus estimate had called for 2.2% higher sales.

Comps at company-owned locations in the US rose 5.9%, above the consensus estimate calling for a 2.8% increase. Following a 2.6% gain in 4Q22, international same-store sales rose 10 basis points in 4Q23, below the consensus estimate calling for a 2.8% increase. The company opened 394 net new stores in 4Q23, consisting of 302 international stores and 72 in the US.

Domino's Pizza (DPZ)
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Fourth-quarter operating EPS was $4.48 per share, up from $4.43 in the prior-year period and topping the consensus of $4.38. The increase reflected improvements to the company’s loyalty program and the benefits of its partnership with Uber Eats. The gross margin rose by 160 basis points to 38.4%.

Driven by unit expansion, accelerated share buybacks, and improvements to the company’s loyalty program, we are raising our 2024 EPS estimate to $16.50 from $15 and setting a 2025 estimate of $18. Our long-term growth estimate is 13%, up from 10%, based on management’s plans to open new stores and accelerate share buybacks.

We rate Domino’s financial strength as Medium-Low, the second-lowest rank on our five-point scale. At the end of 4Q23, the company had $114 million in cash and cash equivalents, and $5 billion in total long-term debt. Operating income covered interest expense by a factor of 4.6 in 4Q23, up from 4.2 in 4Q22. We think the interest coverage ratio should be above 5.

In February, the company raised its quarterly dividend by 25% to $1.51 per share, or $5.04 annually, for a recent yield of about 1.1%. Our dividend estimates are $5.04 for 2024 and $6 for 2025. The board of directors also authorized an additional $1 billion in share buybacks, raising the company’s authorization to $1.14 billion.

Recommended Action: Buy DPZ.

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