We are initiating coverage on Domino’s Pizza Inc. (DPZ) with a Neutral recommendation. While we prefer the company’s ability to post solid earnings growth in recent times; strong brand positioning in the U.S. pizza delivery segment, a strong overseas presence and traction in digital ordering, a sluggish macro-environment and higher prices for cheese keep us on the sidelines at the current level.
Why the Neutral Recommendation?
Domino’s is the market leader in the pizza delivery segment in the U.S. and ranks second in the carry-out segment. Internationally, it is the second largest pizza delivery service based on the number of units and sales.
It delivered solid results in 2012 and continued its winning momentum in first-quarter 2013. Both its first-quarter earnings per share and revenues beat the Zacks Consensus Estimates and grew year over year, driven by improved volumes, global market share growth and operating margin expansion.
Domino’s offers immense growth potential worldwide. It continues to post strong same-store sales in the international markets despite volatile macro-economic conditions in the recent past. It has registered 77 consecutive quarters of positive same-store sales in its international business.
Domino’s has been concentrating and investing heavily on technology-driven initiatives like digital ordering to boost its sales over the last three years. Digital ordering has been consistently at the rate of about 5% a year. This is also an important tool to combat the competition from smaller players in the industry.
However, despite these encouraging facts, some concerns prevent us from being too optimistic on the stock. Both a sluggish macro-environment and higher cheese prices can hamper the winning momentum of Domino’s.
Other Stocks to Consider
Others players in the same industry, which look attractive at current levels include The Wendy’s Co. (WEN), The Cheesecake Factory Inc (CAKE) and Burger King Worldwide Inc. (BKW) all carrying a Zacks Rank #2 (Buy).
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