Apparently No One Told Domino's The Food Industry Is Struggling

Domino's Pizza, Inc. DPZ seems to be in a different world while the U.S. fast food sector is struggling. The company’s third-quarter earnings beat the Street view on its innovative digital strategies and strong comp growth.

Quarter, In Review

Domino’s reported third-quarter EPS of $0.96, above expectations for $0.89–$0.92 and driven by stronger comps and segment margins, which lapped last year’s higher insurance expense. U.S. comp was 13.0 percent, above expectation of 9–10 percent, and Int'l comp was 6.6 percent, modestly higher than the expected 6– 6.5 percent.

“The comp propels unit growth, which continues to track above LT guidance. Beyond fundamentals, the ~100 percent franchised model supports elevated leverage (currently the higher end of their 3–6x LT Debt/EBITDA target) and ultimately a return of cash to holders,” Barclays analyst Jeffrey Bernstein wrote in a note.

Related Link: Domino's Pizza's Q3 Demonstrates Consistent Market Share Gains

Bernstein sees 2016 U.S. comp of 10 percent (along with 7 percent in 2017) relative to the 2–5 percent long-term guide, helped by technology, loyalty and remodels.

Rating And Justification

The analyst, who has an Equal-Weight rating on the stock, also projects 2016 int'l comp of 7 percent (along with 6 percent in 2017) is at the high end of the 3–6 percent long-term guide. Bernstein forecast 8–9 percent worldwide unit growth (in '16 and '17), above company’s 5–7 percent long-term guide.

“While the brand continues to outperform the industry, the question remains the price to pay for such strength, especially in an otherwise low-growth (1–2 percent) & extremely competitive pizza category,” Bernstein noted.

The analyst raised his price target to $144 from $132 and increased full-year EPS view to $4.30 from $4.17.

At time of writing, shares of Domino’s had risen 2.41 percent on the day to trade at $163.30.

Full ratings data available on Benzinga Pro.