This Pizza Stock Can Sustain Its Momentum

Anjali is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Domino’s Pizza (NYSE: DPZ) recently reported strong Q3 results, and the company's shares have gained ~8% in a single day after the earnings announcement. The company’s reported Q3 EPS of $0.43 was above the consensus estimates of $0.41 and represents an impressive year over year growth of 22.5%. The EPS beat can be attributed to higher than expected same store sales growth and new units. System-wide same store sales rose a surprisingly strong 3.3% in the U.S. and 5% internationally.

The company’s strong same store sales growth should alleviate concerns about share losses to Yum! Brand’s (NYSE: YUM) Pizza Hut, which also posted good same store growth (Pizza Hut’s domestic SSS rose 6%) this quarter. Sales during the recent Summer Olympics likely helped out both the pizza chains, and it’s clear that the national pizza chains including Domino’s, Pizza Hut and Papa John’s International (NASDAQ: PZZA) continue to take meaningful market share from privately-held regional pizza players.

I expect this trend to continue, as the regional pizza chains seem vulnerable to the technology edge of these large chains. If you look at the past 5 year period, we can see that these companies have made big bucks. While the shares of Yum! and Papa John’s have surged 89% and 110%, respectively, Domino’s has been the biggest gainer, with the shares returning 185% in the last 5 years. But can the company sustain its momentum? Let’s fist compare Domino’s valuation metrics (forward P/E and PEG ratio) with those of Yum! and Papa John’s.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Domino’s </p> </td> <td> <p>Yum!  </p> </td> <td> <p>Papa John’s </p> </td> </tr> <tr> <td> <p>Forward P/E</p> </td> <td> <p>18.46</p> </td> <td> <p>18.97</p> </td> <td> <p>18.06</p> </td> </tr> <tr> <td> <p>PEG Ratio</p> </td> <td> <p>1.66</p> </td> <td> <p>1.6</p> </td> <td> <p>1.66</p> </td> </tr> </tbody> </table>

Source: Yahoo Finance

We can see that Domino’s stock is valued similarly to Papa John’s and Yum!, both in terms of forward a P/E ratio and PEG ratio. However, Domino’s seems to be better than Papa John’s and Yum! in terms of profitability. Domino’s trailing twelve months’ operating profit of 16.19% is marginally better than Yum!’s 16.08%, and significantly better than Papa John’s’ 7.32%. Here are the key reasons why I think there is a good upside to Domino’s stock.

Growth Opportunities

Domino’s remains well positioned as the leader in US delivery pizza. However, the percentage of digital ordering in the U.S. trails that of some international markets, including the U.K. at 58%, suggesting significant growth potential exists. Moreover, Dominos' international business continues to show impressive growth. McDonald’s described a global slowing of restaurant sales earlier this year and YUM!’s YRI division (the world, excluding the U.S., China and India) reported a disappointing 3Q last week, but there was no evidence of such a slowdown in Domino’s results.

Domino’s is seeing excellent international unit expansion, with the company now exceeding the high-end of its 350-450 annual new unit guidance. The company is looking to further expand its global presence by about 10 to 20 more markets, up from ~70 currently. Thus, I expect international growth to sustain its momentum, as the pizza delivery business is still underdeveloped in many parts of the world and Domino’s is the leader in fulfilling this unmet demand.

Roll-out of Pan Pizza

Pan pizzas account for about 20% of the overall pizza market, a sub-sector where Domino’s has historically not been represented. Given the recent launch of Pan Pizza in the U.S., it seems quite possible that Q4 will experience some same-store sales sequential acceleration. Although management did not report on the early progress of pan pizza, I believe it will be a meaningful catalyst for the next several quarters.

Share Repurchases will provide support

Domino’s has been proactive in share repurchases. During the quarter, Domino’s repurchased roughly 190,000 shares for $5.9 million and bought back another 107,000 shares in early 4Q for $3.7 million. The company still has $194 million of its recently replenished $200 million share repurchase authorization available, which represents about 9% of the company’s market capitalization. Thus, I expect share repurchases to continue which will further provide some support to the stock.

To sum up, I expect Domino’s to sustain its momentum. In the near-term, I see a potential catalyst in yjr roll-out of the new Handmade Pan Pizza. Pan Pizza will drive sequential improvements in the coming quarters and thus, I see a room for stock appreciation. Longer term, both developed and developing markets present good opportunities for Domino’s delivery-based business model, and I believe the company can more than double its current unit count of nearly ~5000 stores in the coming ten years. In addition, the company’s focus on shareholder-friendly activities limits any downside risk.

AnjaliPaliwal has no positions in the stocks mentioned above. The Motley Fool owns shares of Papa John’s International. Motley Fool newsletter services recommend Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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