The Best Investment in Pizza

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“Our pizza stinks!”

That’s pretty much what Domino’s Pizza (NYSE: DPZ) was saying approximately three-and-a-half years ago. Through an advertising campaign, the company admitted its foul-ups and promised to do better. The brilliance behind this concept was that Americans appreciate honesty. The campaign helped, but the improved pizza helped even more.

Recently, Domino’s made further improvements. This doesn’t mean that Domino’s makes a good investment going forward, though. 

The turnaround

After the financial crisis and an embarrassing event involving a worker being taped performing a disgusting act, it looked like Domino’s was on a dangerous path toward failure. Instead of giving up, however, the company planned its work and worked its plan.

Revenue and earnings have consistently improved on an annual basis. In the first quarter, revenue jumped 8.60% and earnings skyrocketed 65.90% year over year. Domino’s has now beat earnings expectations for four consecutive quarters.

Recently, Domino’s added a "Pizza Theater" to some locations which allows customers to watch the pizza-making process. This might sound like a simple feature, but what it really does is ease the concerns of customers in regards to what goes on in Domino’s kitchens. The best part is that you don’t even need to be at Domino’s to feel good about the pizza not being tampered with. Domino’s is busy enough that there’s almost always someone standing there, watching the pizza-makers work. Another neat feature is an electric board that will make it easier to track orders.

As if that’s not enough when it comes to strategic decisions made by management, Domino’s has been way ahead of the industry curve when it comes to digital ordering. Through all of its apps -- now including apps for Windows Phone 8, iPhone, iPod Touch, and Amazon Kindle Fire -- digital orders increased 5% last year. Domino’s even added a Spanish-language app to help maximize its digital ordering potential. 

As far as online orders go, according to Alexa.com, the global traffic rank for dominos.com has dropped 182 spots to 3,025 over the past three months. This might indicate a slight decline in demand, but it’s a very small move and shouldn’t play a big role in your investing decision-making process. 

Dominos vs. peers

Domino’s pizza is currently trading at 27 times earnings, which is right at the industry average. It’s still more expensive than Papa John’s (NASDAQ: PZZA) and Yum! Brands (NYSE: YUM), however, which are currently trading at 24 times earnings and 18 times earnings, respectively. Domino's does yield 1.40%, which is also a selling point. 

Papa John’s has increased its revenue over the past three years, and earnings have improved over the past two years. In the first quarter, revenue increased 7.30% and earnings improved 13.70% year over year. According to Alexa.com, the global traffic rank for papajohns.com has plunged 578 spots to 3,411. This is a more significant drop than dominos.com. This doesn’t necessarily indicate a loss of market share, however; it may simply mean that consumers are cutting back. Either way, it's not a plus. Papa John’s doesn’t pay a dividend, but that has helped the company to keep its balance sheet healthy.

Yum! Brands has delivered consistent annual revenue and earnings improvements, and Pizza Hut has been performing well overseas. The negative press received in China regarding the quality of the chicken used at KFC led to a setback, however. It also doesn't help that the avian flu outbreak came just a few months later, acting as an aftershock. That said, Yum! Brands offers the best margins of this group, the highest yield at 1.90%, and thanks to its product and geographic diversification, the most resiliency.

Conclusion

If you’re looking to be aggressive, Domino’s should be considered as an investment option. Growth has been consistent, and guidance is strong. The shorts are likely grabbing onto the stock due to valuation and debt concerns -- Domino’s has $1.55 billion in long-term debt. If Domino’s continues to grow and increase its global market share, however, then debt shouldn’t be a hindrance (for now).

Papa John’s isn’t as big as Domino’s and its growth potential isn’t as good, but if you don’t want debt to weigh on your mind then this might be a better option for you. It’s simply lower risk/lower reward.

If you want product and geographic diversification, however, as well as resiliency in bear markets, then Yum! Brands will be your best option. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool owns shares of Papa John's International. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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