Investors Love Domino’s New Recipe

“Domino’s Pizza is beginning to deliver with a new recipe, great ad campaign, fabulous international business…” — CNBC’s Mad Money 1/13/2010

Domino’s Pizza (DPZ) has recently unveiled a new recipe for their pizzas obviously in an effort to improve taste and also perception. Their national ad campaign promises more herbs and spices, better dough and a crust brushed with a garlic butter, etc. Domino’s had built an impressive franchise off of the classic-style pizza, and I would imagine few customers would argue it was anything better than an average pie. Their own commercial beats down the old pizza, and promising improvement. Having not tried the new style yet, I cannot comment on it but I am at least intrigued. The market is showing surprising bullishness towards Domino’s stock as it has risen an impressive 46% in the last month alone. The new recipe is providing a catalyst to get investors and analysts excited about the stock.

Television personality Jim Cramer discussed Domino’s last night on Mad Money, and he believes that this stock still has a lot of upside. He had formerly been a bigger fan of DPZ competitor Papa John’s (PZZA) stock, but he is swapping his allegiance for Domino’s and recommends it as a buy. In his opinion, there are plenty of reasons to be excited about the stock beyond just improving the pizza. Domino’s has focused on international growth with 63 straight quarters of improved same store sales abroad, and now sales abroad account for 45% of the total. They are not finished growing internationally either, and management has committed to build more stores to grab market share. Domestically, Domino’s is the market share leader and continues to improve, thanks in large part to Pizza Hut’s (YUM) horrible numbers recently (domestic same store sales fell 13% in the fiscal third quarter).

Following Cramer’s endorsement the stock is surging another 11% in Thursday morning trading. However, we continue to believe there is further for this stock to run over the longer term, which is why we have it as Undervalued. Even though the new pizza is generating a lot of attention and some analysts are upping sales targets as a result, we believe DPZ is attractive even without a meaningful bump to sales. Consider the fact that over the last ten years the market has been willing to pay 6.1x to 14.1x cash earnings, but the current price-to-cash earnings is only 5.3x. Additionally, current price-to-sales .4x is well below the historically normal range of .51x to 1.1x. For the stock to reach just the midpoint of the historically normal ranges would imply a price of around $18 based on current fundamentals. We do not assuming that stocks will always revert to their normal valuations but we think the risk reward is certainly worth a look, even with the exceptionally high debt load.

The fundamentals of Domino’s are attractive and perhaps the fresh outlook on the product is just the spark that the market needed to recognize that underlying value. Thus far, it is hard to deny the market loves the new pizza, and it’s not too late for investors to grab some nice returns.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.