Unveiling Domino's Pizza (DPZ)'s Value: Is It Really Priced Right? A Comprehensive Guide
Domino's Pizza Inc (NYSE:DPZ) experienced a daily loss of -4.3%, and a 3-month gain of 8.54%. With an Earnings Per Share (EPS) (EPS) of 13.23, questions are arising about whether the stock is modestly undervalued. This article aims to answer this question through a detailed valuation analysis. Read on to explore the intrinsic value of Domino's Pizza (NYSE:DPZ).
Company Introduction
Domino's Pizza Inc (NYSE:DPZ) is a renowned restaurant operator and franchiser, boasting nearly 20,000 global stores across more than 90 international markets at the end of 2022. With approximately $17.7 billion in 2022 system sales, Domino's Pizza stands as the largest player in the global pizza market. The firm generates revenue through the sales of pizza, wings, salads, sandwiches, and desserts at company-owned stores, royalty and marketing contributions from franchise-operated stores, and its network of supply chain facilities. Comparing the stock price with the GF Value, an estimation of fair value, we can pave the way for a deeper exploration of the company's value.
Understanding the GF Value
The GF Value represents a unique estimation of a stock's current intrinsic value. It is calculated based on historical multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. If the stock price significantly deviates from the GF Value Line, it may indicate overvaluation or undervaluation, affecting its future returns.
Domino's Pizza (NYSE:DPZ) is estimated to be modestly undervalued according to GuruFocus' valuation method. The stock's fair value is calculated based on historical multiples, an internal adjustment based on past business growth, and future performance estimates. If the share price is significantly above the GF Value Line, the stock may be overvalued, potentially leading to poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued, suggesting higher future returns. At its current price of $364.18 per share, Domino's Pizza stock is estimated to be modestly undervalued.
Because Domino's Pizza is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, it's crucial to research and review a company's financial strength before purchasing shares. Key indicators of financial strength include a company's cash-to-debt ratio and interest coverage. Domino's Pizza has a cash-to-debt ratio of 0.02, which ranks worse than 94.8% of 346 companies in the Restaurants industry. This indicates that the overall financial strength of Domino's Pizza is poor.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Domino's Pizza has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.50 billion and Earnings Per Share (EPS) of $13.23. Its operating margin is 17.7%, which ranks better than 91.98% of 349 companies in the Restaurants industry. Overall, the profitability of Domino's Pizza is ranked 10 out of 10, indicating strong profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Domino's Pizza is 13.3%, which ranks better than 87.16% of 327 companies in the Restaurants industry. The 3-year average EBITDA growth is 12.6%, which ranks better than 65.7% of 277 companies in the Restaurants industry.
Another way to evaluate a company's profitability is by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Domino's Pizza's ROIC is 50.52 while its WACC came in at 9.31.
Conclusion
In conclusion, the stock of Domino's Pizza (NYSE:DPZ) is estimated to be modestly undervalued. The company's financial condition is poor, but its profitability is strong. Its growth ranks better than 65.7% of 277 companies in the Restaurants industry. To learn more about Domino's Pizza stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
