by Tom Taulli | May 16, 2013 11:31 am
Domino’s Pizza (NYSE:DPZ) has been a huge winner for investors for several years, with an average 65% annual gain coming thanks to the company’s knack for posting consistent results.
The latest quarter was a thing of beauty, with earnings rising 26% to 59 cents per share on revenues that improved 9% to $417.6 million — both figures coming in better than Wall Street expectations for 55 cents in EPS on $413 million in sales, respectively.
But have those gains — including a market-trouncing 30% gain year-to-date — been a little too hot for a little too long? Or should you buy Domino’s Pizza with good faith that it’ll keep up its winning ways? To see, let’s look at the pros and cons.
Business Model: About 90% of the locations in the U.S., and 100% of global locations, are franchised. This means that DPZ has low capital requirements since the franchisee makes the investments for real estate, supplies, wages and so on. While there are some risks to the franchise model — such as with quality control — it can be a tremendous way to grow a company. Interestingly enough, Domino’s has even more leverage when compared to a traditional restaurant company because DPZ relies on a carry-out delivery, which means each location is small and requires fairly low maintenance.
Technology: DPZ has made significant investments to push innovation, including a cutting-edge e-commerce site and mobile apps. Domino’s actually is one of the world’s largest digital operators, with $1 billion in sales in the U.S. as well as the same amount in foreign markets. DPZ also has logged 5.6 million downloads of its apps in the U.S., demonstrating a decent mobile presence.
Growth: DPZ has much room to expand in foreign markets. Pizza is considered a value item — for under $25, including tip, you can feed a family of four, making it one of those items that can do well in a tough macroeconomic environment. Perhaps that’s why DPZ’s European sales have actually been growing. But going forward, the company will focus on the emerging markets, especially China and India, which are still in the early stages.
Product: It is not easy to standout, especially in the U.S. market. Keep in mind that there are three competing national chains: Yum Brands’ (NYSE:YUM) Pizza Hut, Papa John’s (NASDAQ:PZZA) and privately held Little Caesars Pizza, not to mention the many regional and local businesses. This puts an emphasis on both marketing strategy and product offerings, because dud products and dud commercials can do plenty of brand damage.
Commodity Costs: Costs have been moderate over the past year, but that can quickly change. DPZ relies heavily on such things as cheese, wheat and sauces, which are subject to periodic jumps in prices.
Valuation: DPZ stock isn’t cheap, trading at 27 times earnings, which could put Domino’s stock at risk should the company suffer a dip in growth. Plus, Domino’s dividend — yielding a meager 1.4% — doesn’t provide enough backside protection to allay concerns about growth.
Since taking the helm of DPZ in 2010, CEO Patrick Doyle has been making all the right moves. He has not only kept up innovation with Domino’s product and marketing efforts, but he also has been aggressive on the technology side.
True, the shares are a bit pricey, but that’s expected amid both Domino’s growth and the lack of signs that said growth is in any danger. After all, there’s still tremendous room for growth in foreign markets, especially China and India.
So should you buy Domino’s Pizza? Yes — for now, the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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