The shares of this pizza franchiser were just upgraded at RBC Capital to ‘Outperform.’
Domino’s Pizza, Inc. (DPZ)
From Argus Weekly Staff Report
We are maintaining our BUY rating on Focus List selection Domino’s Pizza Inc. We think that DPZ is better positioned than most competitors during the pandemic, given its strong brand and emphasis on online ordering and pizza delivery. Management thinks it is particularly important to make ordering 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.
Domino’s 4Q20 results saw revenue rise 18% year-over-year to $1.36 million. Operating earnings rose to $3.85 per share from $3.13 a year earlier.
Domino’s announced its two-to-three year guidance. It projects global retail sales growth between 6% and 10% and global net unit growth between 6% and 8%. 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. We also expect the company to grow through new store openings in the U.S. and internationally. As such, we are maintaining our 2021 estimate of $13.24 and setting a 2022 EPS estimate of $14.80.
DPZ shares are trading at just above 26-times our 2021 estimate, below the industry average of 35. Since the company’s IPO in July 2004, they have traded at an average multiple of 26.9. The price/sales ratio of 3.3 and the price/cash flow multiple of 12.4 are consistent with peer averages. As such, we are maintaining our BUY rating and lowering our target price target to $400 from $455. At current prices, our target, if achieved, offer investors the prospect of a 17% total return.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, March 5, 2021