2023-04-28 11:25:44 ET
Summary
- Restaurant stocks have performed generally well this earnings season.
- Domino's, however, was among the worst S&P 500 stocks on Thursday as its outlook is uncertain amid a shifting consumer demand picture.
- I assert DPZ is undervalued and spot a key zone on the chart to monitor from a risk/reward standpoint.
Restaurants have enjoyed a period in which so-called "food-at-home" price rises have been steeper than inflation in the "food away from home" segment. There are signs that the trend is reversing, however. Restaurant bills are now growing at a quicker pace than grocery costs.
That favors grocery store stocks over eateries, but I see risks baked into the share price of Domino's Pizza ( DPZ ). Following an earnings drop after its Q1 report, shares look like a buy to me on valuation, and I highlight a key technical spot to watch.
FAH/FAHM Spread Now Favors Grocery
BofA Global Research
According to BofA Global Research, DPZ is considered the No.1 pizza delivery company in the world with roughly 16,000 stores in 50 states and more than 70 countries. DPZ's system is more than 97% franchised and 63% of stores are located internationally. The company had been benefiting from a steadily growing online/digital ordering mix that currently represents more than 60% of domestic orders and has a long runway for growth at times during the pandemic.
The Michigan-based $11.2 billion market cap Hotels, Restaurants & Leisure industry company within the Consumer Discretionary sector trades at a high 25.3 trailing 12-month GAAP price-to-earnings ratio and pays a small 1.5% dividend yield, according to The Wall Street Journal.
On April 27, Domino's reported a bottom-line beat while slightly missing on the top line. Revenue was up just 1% year-over-year (below the inflation rate), which is sharply under what many wholesale food companies and grocers are seeing (so a shift back to at-home grocery could be at play). But other restaurants, like Chipotle (CMG) and McDonald's (MCD), are seeing much better volumes as consumers desire to get out of the house while also seeking value meals.
Still, Domino's has upside potential from its mix of domestic and non-US sales - global revenues were up a solid 5.9% (ex-currency hits). What's more, the firm reduced its share count and has an outstanding buyback facility in place.
Domino's: Solid Sales Growth Ex-Currency
Driving the stock price lower intraday on Thursday was perhaps some cautious comments regarding the y/y comp. Tailwinds from Omicron, pricing changes, and an extra week in the first quarter may be transitory, so there are questions regarding the firm's momentum going forward. Other risks mainly surround competition in the fast-food pizza vertical and uncertainty with international growth. Still, the stock looks to be a better value today following a tough stretch since last the early 2022 peak when the Omicron variant reached a zenith.
On valuation, analysts at BofA see earnings climbing at a robust pace this year with an acceleration into 2024 and 2025. The Bloomberg consensus forecast is not quite as sanguine, but still upbeat on the EPS progression following strong COVID-related per-share profits in 2020 and 2021. Dividends are seen as holding just above $4, however.
The problem here is the current forward multiple in a business that's experiencing pains as consumers want to get out and about at restaurants (not simply stay at home with a pizza). With a low yield and stretched EV/EBITDA ratio, the valuation is not cheap on this fast-food name. What I like, though, is that DPZ's free cash flow is solid, though the FCF yield will drop in the coming quarters from a high-water mark this year.
Domino's: Earnings, Valuation, Free Cash Flow Forecasts
With an F valuation grade by Seeking Alpha, I differ with a lukewarm intrinsic value assessment. Consider that the forward PEG is 2.4 - that is just at a slight premium to its five-year average. Also, the forward P/E is at a more than 20% discount to DPZ's history. Shares have historically traded at a 30% premium multiple to the market. If we apply a conservative 24 multiple on next 12-month EPS of $13.80, then the stock should be near $330, thus I'm a soft buy on the valuation.
DPZ: Depressed P/E, PEG Relative to History
Seeking Alpha
Looking ahead, corporate event data from Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Thursday, July 20, before market open. Before that, the stock will trade ex-dividend on Wednesday, June 14.
Corporate Event Risk Calendar
The Technical Take
With shares now at a better valuation compared to past quarters and few volatility catalysts on the horizon, the chart suggests a key support level is in play. Notice in the graph below that DPZ has made a series of lower highs and lower lows since its all-time high above $560 in early 2022 during the Omicron scare. As consumers are now mobile, there is less demand for the pizza delivery man. But the decline also means the stock has retreated to key support from the 2018-19 range highs.
The $290 to $305 area is key support, and I do not want to see another lower low. Rather, a long play with a stop under $280 is a solid risk/reward play. If DPZ can rally above $370, that would help support the case of a break in trend. What's more, the falling 200-day moving average also comes into play around $350 (the spike high on the morning of its first-quarter results hitting the tape).
DPZ: Key Support In Play (But Bearish Descending Triangle Pattern)
The Bottom Line
I'm a buy on DPZ based valuation and technical support. And there are upside risks to the valuation should earnings growth verify well in the coming quarters. I will look forward to keeping tabs on this restaurant stock.
For further details see:
Domino's: Slicing Up A Decent Quarter, Shares Undervalued