Domino’s Pizza (NASDAQ:DPZ) reports first-quarter earnings before the market opens on April 29. Right now, I can understand why some investors may think the thrill is gone. DPZ stock has made an impressive gain of 21% since March 5, 2021. That was after the stock dropped around 14% since the middle of February. This was largely due to the company posting a miss on earnings in the fourth quarter of 2020.
Analysts certainly seem to think DPZ stock is near a top. Their consensus price target is $422.52 which is a bump of only about 5% from the stock price at the time of this writing. The purpose of this article is to point out that Domino’s is perhaps a little undervalued and may still have some upside in 2021.
A High-Margin Business Model
The Domino’s Pizza business model relies heavily on franchising. In fact, 98% of the company’s nearly 17,700 stores are franchised. This means Domino’s generates consistent royalties (currently around 5.5% of sales) without assuming the operational risks.
Simply put, if an individual store location’s margins are squeezed, Domino’s still gets its revenue. And as more stores open, same-store sales increase as well as prices expand, the company’s royalties will grow.
That’s a win-win. And one of the reasons for feeling this way is that Domino’s has seen U.S. same-store sales increase for the last 39 consecutive quarters. This means that Domino’s was continuing to grow its business long before the pandemic.
It also should give investors reason to believe that the company will handle the reopening of the world’s economy just fine. In fact in the company’s most recent earnings report, management suggested that it would have global sales growth of between 6% and 10% in the next three years.
Rewarding Shareholders
It would be impressive enough to note that Domino’s returned $122 million dollars to its shareholders in the form of a dividend in 2020. The company not only maintained its dividend, it increased it by 20% in 2020. And the company is increasing it by another 20% in 2021.
However, the company has also been adept at buying back shares. A recent article in Seeking Alpha pointed out that Domino’s has retired 44.8% of its total shares outstanding in the past 15 years. That trend continued in the fourth quarter. Domino’s bought back $305 million in shares in the fourth quarter. And management has recently approved a $1 billion share repurchase program that will replace the company’s existing program.
All totaled, Domino’s returned over $425 million to shareholders in 2020.
Why Not to Buy Domino’s?
Recent headlines have highlighted the return of The Noid, the villain from Domino’s Pizza commercials in the 1980s. In those commercials, Domino’s autonomous delivery will be highlighted. This isn’t a new program, the company started piloting it in 2019.
Nevertheless, it’s timely even for a post-pandemic world. Some consumers wil like the cool factor. Some will like the perceived safety of a truly contactless-free delivery system.
But that’s not the right reason to buy DPZ stock. By the company's own admission, this type of delivery will not be for everyone. And it will likely only be available in select urban markets to begin with.
True, this may increase the publicity around Domino’s. But there are far better reasons to pursue the stock.
Buy a Slice of DPZ Stock
The combination of a high-margin business model and consistent stock buybacks is allowing the company to expand its earnings per share at rate that is much faster than its revenues. Since 2012, Domino’s EPS has grown at a compound annual growth rate (CAGR) of 25%.
However currently analysts are projecting EPS growth (without dividends) of 12% in 2021 and 21% in 2022. This is forecasting a slow down as Americans return to eat-in dining.
Fair enough, but as the economy begins to reopen, the saying pizza is always a good idea comes to mind. And considering that Domino’s franchise map is not limited to a specific area (suburban, urban, etc.) consumers will always have a way to satisfy their craving.
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