It's Time to Take Another Bite Of Domino's Pizza Stock

Domino’s Pizza's DPZ share price is down more than 10% on a what-if scenario that sets it up as a tasty buy for investors today. What if it can’t meet its goals for international store growth? The cause for concern is the guidance, which includes temporarily suspending the estimated number of stores to be opened this year. The operating word is temporary, which means they will likely be reinstated later. Even if the new count is lower, the company is growing and outperforming estimates today, providing value for investors, and will likely continue doing so far into the future. That’s why analysts are sticking to their ratings and price targets. 

The company trimmed the guidance because Domino’s Pizza Enterprises, one of its master franchises, struggles with new store openings. The impact is an estimated (there’s that word again) 175 to 275 net stores for the year, but the actual impact is yet to be known. The salient detail is that the company reiterated its long-term targets, affirming its belief that long-term store count growth will continue despite the hiccups. 

The analysts agree that the price implosion is a knee-jerk reaction that provides an opportunity for investors. Numerous analysts have reiterated their ratings and price targets, which are a consensus Moderate Buy and potential for a 25% upside from the new low share prices. Because most reiterated targets are above consensus, the odds are high that the rebound will exceed 25% when it comes. Domino’s Pizza is one of the Most Upgraded Stocks tracked by MarketBeat this year. 

Domino’s Pizza Has Strong Q2; Adjusts Guidance 

Domino’s Pizza had a good quarter despite the hiccups with DPE. The company reported $1.09 billion in net revenue for a gain of 7.1%. The revenue fell short of the consensus by $0.01 billion or 90 basis points but is offset by the margin. Revenue growth is driven by 175 net new stores compounded by a 4.8% increase in US comps and a 2.1% increase internationally. Globally, retail sales improved by 7.2% but were impacted by FX translation. Key details include a positive cost pass-through and a 0.7% increase in supply chain revenue due to higher pricing, supported by growth in order counts.

Margin news is mixed. The operating income improved only 0.4% compared to the 7.1% top-line advance but is aided by one-offs that boosted the bottom line result. The $4.03 in GAAP earnings is up 30% compared to last year on the remeasurement of pre-tax unrealized losses in a subsidiary business. Cash flow and FCF were strong, allowing for an improved balance sheet and capital returns. Balance sheet highlights include a greater than 2x increase in cash, increased current and total assets, and reduced shareholder deficit. 

The capital return includes dividends and share repurchases. The share repurchases aren’t robust but substantial and offset the dilutive impact of share-based compensation. The dividend is more substantial and growing. It is near the high end of the historic range, with shares at a new low, about 1.4% annual yield, and is growing at a double-digit CAGR.

Institutions Will Buy DPZ at These Price Points

Institutional support for DPZ stock is robust and should be expected to continue supporting this market at the new price points. The institutions, which own about 95% of the shares, have bought on balance for seven of the last eight quarters, with their activity spiking to long-term highs in Q1 this year. That activity coincides with the rise in stock prices to new highs consistent with today’s low price point. The 10% correction is a concern but brings the price action back into a zone where institutional buyers can pull the trigger on this restaurant stock. 

The critical support target is near $410 and is already being tested. The market shows some signs of support at this level, but there is a risk of lower prices. In that scenario, DPZ shares could fall as far as $320, but that is not expected. The company trimmed its target for growth this year, reaffirming its long-term targets; it didn’t signal flagging business trends or contraction. It will recover from this hiccup quickly. 

The article "It's Time to Take Another Bite Of Domino's Pizza Stock" first appeared on MarketBeat.