Domino's Pizza Stock (NYSE:DPZ): Why I Expect New Highs Soon


It looks like Domino's Pizza (New York Stock Exchange:DPZ) shares are expected to soon reach new all-time highs. The world's largest pizza franchisor maintains strong growth momentum, fueled by bold new store openings and solid same-store sales growth. The company is also expanding its margins, further strengthening its profitability outlook. Domino's stock is not cheap, but the company's earnings growth trajectory suggests the current rally can be sustained. Therefore, I am bullish on DPZ stock.

DPZ has risen 67.9% over the past year, approaching an all-time high.

New store openings and increased sales at existing stores are driving the recovery in profits

Domino's revenue is expected to decline 1.3% in fiscal 2023 but recover strongly in fiscal 2024. The company posted its best revenue growth in the past six quarters, up 5.9% to $1.08 billion in the first quarter, driven by strong new store openings and same-store sales growth.

In terms of same-store sales growth, the U.S. saw a strong 5.6% increase. This result was driven by a 9.5% increase in carryout (i.e. picking up pizza in-store rather than delivery) and a 2.9% growth in delivery, primarily driven by increased transactions. This was supported by growth from Domino's new loyalty program (including the continued benefit of the “urgent pizza” promotion, a 0.9% benefit from pricing, and a 1.4% sales mix growth from Uber).

Meanwhile, international same-store sales growth was just 0.9%, but it's still a welcome development.

In terms of new store openings, Domino's maintained its strong momentum, adding a total of 164 stores during the quarter, increasing new store openings in the past 12 months to 747 stores. Domino's therefore ended the quarter with a total of 20,755 stores, up from 20,591 stores at the end of last year. It is clear that market demand for Domino's Pizza remains strong, as new store openings (see below) are quickly filling local demand.

Source: DPZ Q1 2024 earnings report

Expanded margins lead to superior profitability

Domino's modest single-digit revenue growth in the first quarter may not grab investors' attention, but its improving profitability will. For those unfamiliar with Domino's business model, it's worth noting that 99% of the company's stores are franchised. This model allows Domino's to comfortably collect royalties equal to 5% of each store's total sales. Additionally, as the sole distributor of all ingredients needed for its stores, Domino's enjoys a streamlined model that makes it very easy for it to increase margins as it expands over time.

Notably, Domino's supply chain gross margins expanded to 11.1% from 9% last year. Company-operated store margins (albeit still a small portion of revenue) also increased from 16.9% to 17.5%. Most importantly, in addition to increased same-store sales and higher royalties (the largest portion of revenue) from new store openings (which do not incur any additional costs), operating margins increased to 19.4%, representing a significant expansion from last year's operating margins of 17.3%.

As a result, Domino's operating income increased 18.4% to $210.4 million, net income increased 20.1% to $125.8 million, and earnings per share increased an even stronger 22.2%, thanks in part to a reduction in share count due to share buybacks. Looking back at the single-digit revenue growth, we can see the quality of Domino's business model and why investors are consistently willing to pay a premium valuation for the company's shares.

Domino's valuation remains relevant

As for Domino's valuation, I believe the company is fairly priced. Here's why I think it could rise further from current levels. First, the consensus estimate is for earnings per share to grow 8.4% to $15.89, which I think is fairly conservative given that earnings per share growth in the first quarter was much stronger. But even assuming this estimate is correct, Domino's stock is trading at roughly 32 times this year's expected earnings.

Given that Domino's double-digit revenue growth is expected to continue for the next few years, and given the quality of its business model and brand value, this multiple seems quite reasonable. For reference, DPZ shares have historically traded at higher multiples despite similar growth prospects. Therefore, from current levels, we expect the stock to reach new highs sooner or later.

Is DPZ stock a buy according to analysts?

Looking at Wall Street sentiment towards the stock, Domino's Pizza has a Moderate Buy consensus rating based on 16 Buys, 11 Holds, and 1 Sells over the past three months. DPZ's average price target is $543.19, suggesting an upside potential of 6.2%.

If you're not sure which analyst to follow to buy or sell DPZ stock, check out Chris O'Cull of Stifel Nicolaus. Over the past year, he has consistently outperformed, boasting an impressive average return of 31.02% per rating and a success rate of 96%. Click on the image below to find out more.

summary

In conclusion, I believe Domino's Pizza is poised to achieve new all-time highs in the near future. The company's continued trajectory is undeniably impressive. Domino's has demonstrated a strong revenue recovery driven by new store openings, solid same-store sales growth, and exceptional profitability driven by expanding margins.

Although the stock is trading at a premium valuation, Domino's has the potential to deliver continued double-digit earnings growth and current multiples seem reasonable, which is why I'm bullish.

Disclosure

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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