Should I order Domino’s Pizza stock?
domino‘pizza (NYSE:DPZ) has had a great run for investors over the past few months, with its stock price surging about 24% since November 1st.
The country’s largest pizza chain is on the rise again this week, up about 3% since the market closed on Friday. Let’s take a look at what fueled Domino’s profits and whether it can continue to deliver.
Return to normal?
Domino’s stock has been helped by numerous recent upgrades from analysts. This week, analysts at Gordon Haskett upgraded Domino’s to a buy and raised their price target to $467 per share, while Morgan Stanley (NYSE:MS) maintained an overweight rating and raised its price target to $465 from $455. Stifel and Barclays also upgraded Domino’s to Buy this year, and the overall consensus from the 30 analysts covering it is that the stock is a Buy with a median target price of $452 per share. This is an increase of approximately 7.2% compared to the current stock price.
Much of the positive sentiment stems from the improving macroeconomic outlook for restaurants, especially quick-service restaurants (QSRs) that appeal to cost-conscious consumers, like Domino’s. With expectations of lower inflation, easing labor shortages and fewer supply chain disruptions, analysts believe things will start to return to normal in 2024 after a difficult few years. According to a Technavio report, the global pizza market is expected to grow at a CAGR of 6.2% until 2027.
When it comes to Domino’s Pizza more specifically, there are some promising signs that it can maintain its momentum. At its Investor Day last December, the pizza delivery chain unveiled its growth plan, calling for 7% annual sales growth, 8% profit growth, and 5,500 net new stores from 2024 to 2028. It also requires 3% same-store coverage per year. Gordon Haskett’s analysts call revenue growth conservative based on catalysts and growth drivers.
This outlook is up from a 1% year-over-year decline in U.S. same-store sales in the most recent quarter and a 3% increase in international same-store sales last quarter.
Partnership with Microsoft
One of Domino’s’ major new initiatives stems from its partnership with Microsoft (NASDAQ:MSFT). Through this partnership, Domino’s Pizza will leverage Microsoft’s generative AI and cloud computing to enhance the ordering process through personalization and streamline operations for store managers.
For the first nine months of 2023, Domino’s net profit rose 23% to $362 million. Revenues have grown steadily over the past decade, except for a post-pandemic decline. Over the 10 years ending September 30, the pizza delivery chain’s net profit grew by an average of 14% per year.
One concern is Domino’s debt, which has risen steadily since the pandemic began and now stands at about $5 billion. At the same time, cash and cash equivalents decreased to approximately $295 million. The good news is that Domino’s free cash flow increased from $279 million to about $364 million in the first nine months of 2022, so it will hopefully be able to keep its debt manageable as revenue grows and things start to normalize. .
Overall, Domino’s has a pretty decent valuation, trading at about 28x earnings, similar to where it was at the beginning of the year. Based on expected growth and revenue history, it looks like a good option. The company is scheduled to report its fourth quarter and fiscal 2023 results on February 26, which will provide more insight into the company’s outlook and prospects.
disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.
