Domino’s Pizza (NYSE:DPZ) Rises On Wave Of Analyst Upgrades

A Tidal Wave With Tailwinds Will Push Domino’s Pizza Higher
Domino’s Pizza (NYSE:DPZ) has a long history of analysts upgrades. Since the first quarter of 2020 there have been at least 25 major analysts calls and they are all bullish. The updates range from simply reiterated buys to outright upgrades and target increases but the trend is clear. Domino’s is growing, the shares are getting more valuable, and the trend is not yet over. The latest was issued within the last week and point to more of the same. Steady continued market share gains, revenue growth, profits and dividends.

Analyst Brian Bittner of Oppenheimer says"our analysis suggests the investment community underappreciates the path of SSS through 2021 and the medium-term unit growth opportunity … Relative value has become attractive with shares only in-line with pre-COVID levels, despite higher '21E earnings estimates and room for further revisions, in our view."

Andrew Charles of Cowen upgraded the stock to Outperform saying "We believe Domino's is implementing a successful long-term playbook to help extend the success the off-premise and digitally-oriented business is seeing amid COVID-19. This includes menu and technological innovation, expanded value offerings and an ad fund surplus to help gain share in the $41 billion QSR pizza category.”

Revenue Gains Will Stick For Domino’s Pizza

The 2nd quarter results were excellent and the company is only expected to build on those gains. Total comp sales increased 16.1% to exceed consensus by 500 basis points and that does not include new stores opened during the quarter. The consensus for 3rd quarter growth is in the range of 2.5% which I think quite low given the evidence. Sales growth may have decelerated from the 2nd quarter but I doubt it was that much.

Longer-term, Domino’s is projected to produce mid-single-digit sales growth on a YOY basis for the next few years at least. The evidence is in the hiring. The company recently announced an additional 20,000 hires across all operational segments to meet the demand. Although some of the latest innovations were met with less than wholehearted enthusiasm from its customers the attempt to innovate and gain market are positives.

The consensus rating for Domino’s Pizza is a buy and has been getting stronger over the past few weeks. Even so, there are still 9 of 30 analysts with neutral ratings which ultimately is a good thing, the can provide additional fuel to the analyst-driven rally as time progresses. The consensus price target is $409 or about 3.5% upside from recent price action but this too is low. The high price-target is $450 and there are a growing number of analysts on board with that estimate.

Domino’s May Not Be A Buy At These Levels

As attractive as Domino’s growth outlook is, the stock may not be a buy at current levels. Trading near $395 the stock is valued at 31X this year and 30X next year’s earnings which is a bit high for the fast-food group. McDonald’s (NYSE:MCD) is trading near 38X its earnings but McDonald’s pays a much larger yield. Others in the group are trading in the low to high 20’s which suggests Domino’s is a bit overvalued compared to them. Papa John's (NASDAQ:PZZA) is a different story. That pizza maker is trading near 52X its earnings for why, I don't know. It's a great company it’s not the only fast-food restaurant to do well in the post-pandemic environment .

Price action has been giving mixed signals over the last month or two. While the trend/bias remains bullish the stock is trading near the bottom of a range and maybe heading lower. If the stock can’t get back above the short-term moving average a retest of the $380 level should be expected. If the stock can move above the short-term moving average it may continue up the top of the range near $420. The next earnings release is October 8th and may provide a catalyst for new highs. The risk is with the market, an overeager market may not be happy with the results no matter how good they are.