Domino's Pizza: Growth at a More Reasonable Valuation
- By Nathan Parsh
Shares of Domino's Pizza Inc. (NYSE:DPZ) have gained just 9.9% over the last year and have lost 3% since the beginning of 2021. Compare this to the S&P 500, which has a return of 56% and 5.8% over these periods of time.
Comparing these results, you might think Domino's is a struggling business or growth has slowed, but you would be wrong. The company's most recent quarter capped an excellent year and estimates for the next few years are forecasting that more growth is on the way.
With shares trading almost 14% of their 52-week high, this might be an excellent time for investors to get long one of the fastest-growing companies in the quick-service restaurant business.
Recent earnings highlights
Domino's reported fourth-quarter and full-year earnings results on Feb. 25. For the quarter, revenue grew 17.9% to $1.36 billion, but missed estimates by $20 million. Net income of $151.9 million, or $3.46 per share, compared very favorably to net income of $129.3 million, or $3.13 per share, in the same period a year ago. Results were 44 cents lower than Wall Street analysts had expected.
For 2020, revenue increased 13.8% to $4.1 billion. Net income of $491.3 million, or $12.01 per share, was up considerably from net income of $400.7 million, or $9.57 per share, in 2019. A lower share count drove some of the adjusted earnings per share growth, but net income was still higher by 22.6% for the year.
U.S. same-store sales grew 11.2% in the fourth quarter, driven by 11.4% comparable growth for franchise stores. Company same-store sales improved just over 8%. Comparable sales for the year in the U.S. rose 11.5%. International same-store sales were up 7.3% and 4.4% for the quarter and full year.
The full-year growth rates look even more impressive when recalling that some 600 stores were temporarily closed for long periods of time in 2020 due to the Covid-19 pandemic. This underlines the strength in demand for Domino's from consumers.
Domino's has now experienced 39 quarters in a row of growth in the U.S. and 108 consecutive quarters of growth in international markets. The company isn't resting on past success either as it continues to aggressively expand its reach. Domino's opened a net 388 stores during the fourth quarter: 116 in the U.S. and 272 in international markets. For the year, the company opened a net 229 stores domestically and 385 aboard. In total, Domino's has more than 17,000 stores worldwide, a figure few other pizza chains can match.
Helping to spur growth is the company's focus on digital channels. In fact, digital channels accounted for more than half of global sales during the year. This percentage is even higher in the U.S. as this channel contributed more than 70% of total sales for this region.
Domino's has also proven very successful at returning capital to shareholders. The company announced a 20.5% dividend increase for the upcoming March 30 payment date. This is above the dividend's compound annual growth rate of 18.8% since the company began making distributions to shareholders in 2013. The dividend has now increased for eight consecutive years. Domino's issued a new share repurchase authorization of up to $1 billion, or 6.8% of the company's current market capitalization.
Domino's maintains a solid balance sheet as well. The company had total assets of $1.6 billion, current assets of $869 million and cash and equivalents of $169 million at year's end. Inventory was lean at less than $67 million. Total liabilities were $4.9 billion, with current liabilities of just $471 million. Total debt stood at $4.4 billion, but just $2.9 million is due within the next year.
Analysts surveyed by Yahoo Finance expect the company to earn $12.87 in 2021, which would be a 7.2% improvement from the prior year. Estimates for 2022 are even better at $14.82. Of course, a lot can happen in two years, but clearly the analyst community expects growth to continue. The miss on revenue and earnings per share doesn't seem to impact what the market expects from Domino's.
Valuation
With a current share price of $375.49, Domino's is trading with a forward price-earnings ratio of 29.2 using estimates for the current year. The stock now trades at a discount to its five-year average price-earnings ratio of 30.5. Using 2022 numbers, Domino's trades at 25.3 times expected earnings per share.
Domino's also appears cheap when using its intrinsic value, or GF Value, as calculated by GuruFocus.
Domino's has a GF Value of $407.97. Using the current share price, the stock has a price-to-GF Value of 0.92. Shares would have to rise almost 9% to meet the GF Value. Factor in the small but aggressively growing dividend, and total returns for the stock would be almost 10%. As you can see from the chart above, Domino's hasn't been this far below its GF Value in sometime.
Final thoughts
Domino's had an excellent fourth quarter and 2020 as the company thrived in a difficult operating environment. Even the closure of a large number of stores couldn't keep comparable sales growth down. In fact, same-store sales in the U.S. more than tripled and international comparable sales more than doubled.
Investors appear to have cooled on the name, likely thinking that same-store sales may have peaked. The top and bottom line miss in the fourth quarter didn't help either.
Even with these caveats, I note again that Domino's has been very successfully growing sales over a very long period of time. The company has posted almost 10 consecutive years of same-store sales growth in the U.S. and 27 years in a row of comparable sales growth in international markets, showing that consumers continue to choose the company's products over competitors.
The company continues to expand its store count without any apparent market saturation and investment in digital capabilities long before peers has also proven to be fruitful. Analysts, by way of their earnings per share estimates for the next two years, don't appear to have given up on company's ability to grow.
Due to the company's growth, leadership position in its sector, dividend growth track record and valuation, Domino's continues to be a buy in my opinion.
Disclosure: The author has no position in any stock mentioned in this article.
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This article first appeared on GuruFocus.
