Research Note Summary
On the heels of my recent research note covering Pizza Hut’s parent company Yum Brands (YUM), I am sticking my head in the pizza oven again with today’s rating of its competitor in the quick-serve restaurant sector, and a household name in the US for decades, Domino’s Pizza (NYSE:DPZ).
Besides the latest pizza on sale at Domino’s, today I am also slapping this stock with a sell rating, my first one of this month.
This sell rating is driven by negative points such as poor revenue growth, overvaluation, below average dividend yield, and negative equity. The current share price crossover above the 200-day average could be a nice sell opportunity.
Offsetting the negatives are a nice 3-year dividend growth, YoY profitability growth, and positive cash flow.
The risk of high debt load impacting equity was offset by the fact that the debt is falling, as is interest expense.
My WholeScore Rating methodology looks at this stock holistically across multiple categories including key risks, and assigns a rating score. I exclusively cover stocks and foreign ADRs that are dividend-paying and trade on major US exchanges only (NYSE, Nasdaq).
Growth vs Industry Peers
In putting together a comparison table to compare this stock to in terms of YoY revenue growth, I decided on 7 stocks from the restaurants sector, all of which are major brand names in the quick-serve subcategory of restaurants.
In this peer group, Domino’s did not show a lot of strength as its YoY revenue growth was negative, coming in far below the peer group average of 8.79% YoY growth.
As my table shows, the top winner in this case is fast-food chain Jack in the Box (JACK), with 28.1% YoY growth, while two major pizza chains are towards the bottom.
This subcategory typically is a combination of company-owned restaurants and those owned and operated by franchisees who pay some type of franchise fee and or royalty to the parent company.
It is a capital-intensive industry, often requiring the taking on of high levels of debt to finance the overhead, and depending on high volume of sales each day. Because Domino’s also has competitors in this space, who are growing their retail footprint globally with new restaurant openings, Domino’s must also try and keep up with growth.
Unfortunately, the growth outlook is lackluster according to its own projections. Based on this, my own sentiment is cautious on this stock when it comes to growth.
The top-line revenue picture is mediocre, with a nearly 4% YoY drop in revenue that missed my goal.
A brighter picture exists with profitability, with a 46.5% YoY growth in net income, which beat my goal.
The free cashflow is also looking positive on a YoY basis, but missed my goal and could use some more strength. In terms of equity, the company saw a 4% YoY decline, also missing my goal.
We know that both cashflow and equity can be impacted by share buybacks, for example.
From the fiscal Q3 earnings release, the company said the following on share buybacks:
During the third quarter of 2023, the Company repurchased and retired 229,860 shares of common stock for a total of $90MM. As of September 10, 2023, the Company had a total remaining authorized amount for share repurchases of $199.5MM.
So, the continued campaign of share buybacks I think will likely impact cashflow and equity going forward.
The dividends growth picture looks great, as I showed in the table below. For example, when comparing the dividend from Sep 2023 with that of Sep 2020, we can see a 55% growth over those 3 years, which I think is a great sign for dividend-income cashflow investors.
The dividend yield, however, is subpar, being 45.7% below the sector average. This is a concern to me as a dividend investor when comparing stocks to add to my portfolio.
No indication of further dividend hikes have been announced for now, so I expect it to continue at $1.21 per share.
Share Price vs Moving Average
The share price as of this article writing, and the closing price on Nov 2nd, was $348.48, which is slightly above the 200-day moving average which I am tracking.
My portfolio goal is to find a dip-buying opportunity below the moving average. The chart shows that crossover below the average happened back in December, and recently as well, followed by a rebound. Consider if I had acquired shares at the January price dip, a nice sell opportunity would have been at the August highs, creating a very nice price spread.
From my table, I determined that the current price is slightly more than I would like to pay for it, so I think I will pass right now as a buying opportunity.
However, if I had been a buyer at the June lows, right now presents a very nice sell opportunity with around $60 per share capital gains potential.
Performance vs S&P500 Index
The market momentum on this stock as of this article writing was lackluster, with the 1 year price return on Domino’s trailing the S&P500 for most of the year, and continuing to do so.
However, many of its peers in the peer group I selected also have been sluggish vs this index. For example, fellow pizza chain Papa John’s (PZZA) saw a -14.35% price return over the last year, while burger joint Wendy’s (WEN) had a -8.78% return.
So, I think the sector itself is a struggling one in terms of momentum vs this index, an index that has all the big tech stocks in it which saw a lot of bullishness this year.
I think the saving grace for this industry is what I said in another article.. it sells an essential item, food! I believe there will continue to be enough customer volume to support these brands.
Consider that an August article by The Washington Post highlighted 6 reasons why fast food is on the rise again:
Valuation and ROE
The valuation metrics for this stock are as follows:
I can really only consider the forward P/E ratio, which shows heavy overvaluation, in fact 72% higher than the sector average. I would say such a high P/E is due to a drop in the earnings side of that ratio, along with a slight jump in the share price. It will come down again if the share price stays where it is and earnings improve in the next quarter.
In terms of the price to book value and return on equity, those metrics are not available on Seeking Alpha and impacted by the company’s negative equity. This will continue to be an issue as long as negative equity exists on the balance sheet.
If you look at the balance sheet, this company has been suffering from negative equity for as far back as Jan 2022, for example:
What are the drivers of this?
I have discovered an important data point and that is the fact that $1.6B in total assets is overshadowed by $4.86B in long term debt!
On the bright side, the metrics also show a decreasing trend in the long term debt, which is at least one positive point to make.
The key risk I have determined for this company is a credit risk.
For example, I already showed the high levels of debt this company has and several quarters of negative equity, with debt far exceeding assets.
However, in this high interest rate environment, I also discovered that their interest expenses are coming down, which is a major plus:
Based on this, I have decided to give this company a total risk score that is just within my tolerance level.
I think what can help such a debt-burdened company will be solid sales growth globally, leading to stronger revenue coming in. We can see, for example, that in Q3 this company is showing relatively good numbers in the international market, even more so than the US market:
Today this stock gets a WholeScore of 2, earning a Sell Rating by me.
In comparison, my rating today is more bearish than the consensus from analysts and the quant system.
My Forward-Looking Sentiment
Holistically speaking about this stock, I see it as a profitable company and well-known pizza brand name with dividend growth but struggling with revenue declines, stiff competition in its peer group, overvaluation and negative equity driven by a high debt burden.
I don’t see it as a buying opportunity, and would offload it from my portfolio right now if I could achieve a capital gain, instead focusing on some of the other stocks in its peer group if I was focused on this particular sector.
What could help this company going forward is much better revenue growth among peers, continued profitability, and paying down a lot more of that debt to get back to positive equity again.