Domino’s Pizza: Hold As Competitors Cede Control Over Delivery

CHICAGO, IL - OCTOBER 12: The company's logo across the front of an awning marks the location of a Domino's restaurant on October 12, 2017 in Chicago, Illinois. Shares of the restaurant chain fell 4 percent today despite reporting an increase of more than 8 percent in domestic same-store sales. (Photo by Scott Olson/Getty Images)

Having its roots in pizza delivery, Domino’s Pizza, Inc. (DPZ), founded in 1960, is battling third-party delivery operators offering the diners more restaurant choices and convenience. With deliveries making up more than two-thirds of its total orders, the company has missed consensus revenue estimates for five consecutive quarters. The stock has gained only close to 6.5% year-to-date compared to c. 31.4% of Dow Jones Restaurants & Bars Index.

However, DPZ is targeting USD25 bn of global retail sales by 2025 with an estimated annual compound growth of c. 10.0%, the midpoint of the sales guidance for the next 3-5 years. A constant operating margin of c. 16.6% over a 10-year investment horizon targeting c. USD5.9 bn of revenue by year six suggests c. 12.8% upside to the stock. The relative valuation using the five-year median forward PE ratio also indicates a moderate gain. However, it’s better to hold the stock as DPZ boosts revenue with its own delivery network, which gives it better control over costs while its competitors rely on third parties for their expansion.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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