Pizza Well-Done: Strong Gains At Domino's Prompt Deutsche Bank Downgrade

Pizza chain Domino's Pizza, Inc. DPZ has rewarded investors with a run-up in its stock over the past few years, and the valuation has led Deutsche Bank to shift to a neutral stance. 

The Analyst

Deutsche Bank's Brett Levy downgraded Domino's Pizza's stock rating from Buy to Hold with an unchanged $235 price target.

The Thesis

Levy initiated coverage of Domino's Pizza's stock in December 2017 with a Buy rating and $210 price target that was lifted to $235 in February. Now that the stock has gained around 26 percent since the December initiation, a neutral stance may be warranted for three reasons, the analyst said:

A now-stretched valuation, with the stock trading near a 52-week high.

An unfavorable risk-reward profile, as Street expectations are assuming improved same-store sales momentum after last quarter's slowdown.

The overall pizza restaurant space is now "a little more competitive or potentially irrational."

Despite a downgrade from a bullish rating, Domino's Pizza's strategy, execution and positioning remain "constructive," the analyst said. But at the same time, a "more cautious" stance on the three biggest pizza chains is warranted, including Papa John's Int'l, Inc. PZZA and Yum! Brands, Inc. YUM's Pizza Hut business, Levy said. 

Price Action

Shares of Domino's Pizza were trading lower by about 2.5 percent at the time of publication Wednesday. 

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