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5 Reasons Why You Should Add Domino’s to Your Portfolio Now

Zacks

According to the latest Black Box Intelligence Report, cautious optimism has resurfaced for the restaurant industry, heading into the second-quarter 2017. This follows a prolonged period of difficulty in the space and the industry’s worst period since the end of recession. We believe that one restaurant stock that can help you gain an upper hand right now is Domino’s Pizza, Inc. DPZ. This Zacks Rank #2 (Buy) company has fine prospects and should make a value addition to your portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Ann Arbor, MI, and founded in 1960, Domino’s, through its subsidiaries, operates as a pizza delivery company in the U.S. and internationally with 14,000 locations in more than 85 markets.

Earnings & Revenue Growth

Domino’s makes for a great pick in terms of Growth investment. Arguably, nothing is more important than earnings growth as surging profit levels are often an indication of strong prospects (and stock price gains) ahead for the company in question.

While Domino’s has put up a historical (3-5 years) EPS growth rate of 27.7% compared with the industry average of 6.7%, investors should really focus on the projected growth. Here, the company is looking to grow at a rate of nearly 26.1%, thoroughly crushing the Zacks categorized Retail-Restaurants industry’s average, which calls for EPS growth of just 6.4%.

Propelling the earnings forward is the company’s solid revenue growth story. Evidently, its last five years revenue growth is 10% better than the industry’s average of 7.8%. However, the projected sales growth for the current year is pegged at 11%, while the broader industry’s estimate is just 1.8%.

Notably, Domino’s has posted positive comps internationally and domestically in 93 and 24 consecutive quarters, respectively. The company’s solid brand positioning should continue to boost sales in the upcoming quarters. In fact, Domino’s is the market leader in the delivery segment in the U.S. and ranks second in the carry-out segment.

Going forward, the company’s initiatives on the digital front, focus on re-imaging of restaurants and other sales boosting strategies are expected to help sustain the momentum. Efforts to accelerate its presence in high-growth international markets also bode well.

For all these reasons, and more, the company currently has a Growth Score of ‘A’ on our style score system that helps us to identify potential outperformers.

Stock Price & Other Returns

Shares of Domino’s have rallied over 32.4% year to date, widely outpacing the industry’s gain of 11.3%. While any stock can see a spike in price, it takes a real winner to consistently outperform the market. In this context, we noticed that Domino’s has outperformed the industry in all of the other time frames we considered – 1-week, 4-week, 12-week as well as 52-week.



Notably, Domino’s has a wide franchise network, both domestically and internationally. Reducing its ownership of restaurants and focusing more on re-franchising minimizes the company’s capital requirements and facilitates earnings per share growth and ROE expansion. In addition, free cash flow continues to grow, thus allowing reinvestment for increasing brand recognition and shareholder return.

In fact, the company has increased its dividend by 25%, 24%, 23% and 21% in 2014, 2015, 2016 and 2017, respectively, after initiating regular dividends in 2013. Moreover, Domino’s is less affected by food inflation as a result of franchising compared with other pizza companies with global operations.

Estimate Revisions

Domino’s has beaten earnings estimates in each of the trailing four quarters, recording an average beat of 6.04%.

Further, upward estimate revisions reflect optimism in the stock’s prospects. Analysts have bumped up their earnings estimates for current quarter and current year, over the last two months. The current quarter estimate has moved north by 3.4%, reflecting three upward revisions versus two downwards. Similarly, the current year estimate has moved up 4.2% on the back of five upward revisions versus none in the opposite direction.

Low Beta Stock

A stock with beta less than 1 suggests that the price movement of the stock is not highly correlated with the market. Since they are less volatile than the market, they are safer bets at the moment. Domino’s has an impressive beta of 0.35. Therefore, adding it to your portfolio brings down your portfolio’s overall beta, thereby reducing its risk.

Digital Leadership

The digital wave has hit the U.S. fast-casual restaurant sector as more and more restaurants are deploying technology to enhance guest experience. Domino’s is also investing heavily in technology-driven initiatives like digital ordering to boost sales.

Particularly, Domino's world-class digital ordering platforms like Google Home, Facebook Messenger, Apple Watch, Amazon Echo, Twitter and ordering via a Pizza emoji on text should further boost digital orders. The extended ways to order a pizza has thus kept Domino’s in the forefront of digital ordering and customer convenience.

Digital leadership is helping the company expand its brand in the domestic market as well as overseas. In fact, emphasis on technology innovation helped Domino's reach an estimated $5.6 billion in global digital sales in 2016. At the end of 2016, the company generated over 60% digital sales in the U.S. Further, nearly 50% of its international sales come from digital channels.

Going forward, the company is committed toward continuing with its investments and maintaining its lead in the digital arena which should further boost sales and enhance its competitive positioning.

Bottom Line

The pizza category is a fast growing segment in the U.S. quick-service restaurant industry and Domino’s ranks as the second-largest pizza chain in the world. The company’s operational advantages, given its market share and scale, along with consistent focus on innovation, execution of growth strategy and digital initiatives, should help maintain its solid performance in the quarters ahead. Its aggressive international expansion policy also bodes well.

However, investors should be cautious about higher labor costs and a challenging sales environment in the U.S. that is hurting the industry at large. Further, competition from other pizza companies like Papa John’s International, Inc. PZZA, YUM! Brands, Inc.’s YUM Pizza Hut and Papa Murphy’s Holdings, Inc. FRSH, remains a threat to the company’s top-line growth.

Nevertheless, demand for pizza is hardly ever going to go down and pizza giants like Domino’s ride on this certitude. We thus remain hopeful on the stock’s prospects, going ahead, as it continues to reflect strength in several areas.

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