DPZ - Domino's Pizza

[SlowAppreciation]

Surprised there's no thread yet, but the company has healthy FCF, low CapEx requirements, and attractive economics for franchise owners. For those interested, there's a good read in Bloomberg: https://www.bloomberg.com/features/2017-dominos-pizza-empire/

[eclecticvalue]

It will be interesting to see how fast casual pizza makers. Mod Pizza and Blaze Pizza will do compared to Dominos and Pizza Hut.

[flesh]

Where's the value? Are you seeing 20% growth long term or?

[SlowAppreciation]

Where's the value? Are you seeing 20% growth long term or?

 

I didn't say it was priced below intrinsic value. I just think it's a good company with attractive characteristics/economics. So just sitting on the sidelines hoping that Mr. Market eventually gives me a fair price.

[peridotcapital]

The valuation seems insane, no?

 

Here the latest note from the DiningStocks.com research service:

 

"Shares of pizza giant Domino's (DPZ) are rising 2% today after reporting strong fourth quarter results. Same store sales rose an impressive 12.2% domestically and by 4.3% internationally. The company also provided average annual growth targets for the next three to five years that, if achieved, would be very impressive (6-8% system growth and 3-6% same store sales growth).

 

From a fundamental perspective, DPZ seems to have it all; a franchise-heavy model, global growth opportunities, economies of scale, great prices, and a focus on delivery. And yet we still stubbornly assign a "1" rating to the stock. Why? Because at the current $190 per share price, Wall Street is assigning a $9.3 billion equity value and $11.4 billion enterprise value to a company that in 2016 generated $230 million of free cash flow and $500 million of EBITDA. That equates to 23x EV/EBITDA and 41x free cash flow. Forget the dining sector, try finding companies in any sector that command that valuation. Off of the top of our head we know of none, though surely there are maybe a few dozen out there of the more than 3,500 publicly traded stocks.

 

Maybe we are simply missing something here, but we can only conclude that DPZ's fabulous stock run of the last four years (from $50 to $190 per share) is overdone. If we are right that the valuation is out of whack, we would expect underwhelming stock performance over the next five years as the business catches up with the stock."

[Pelagic]

Anyone else read that piece and come away thinking Domino's should partner with Amazon for delivery?

 

“We’re delivery experts,” Maloney says. “If everyone becomes an expert, we’d have to figure out other ways to differentiate ourselves.”

 

Maybe pizza isn't their strong suit, although I'll admit they have made it a lot better than it was, but with all their stores and delivery drivers they just might have the best "last mile" delivery network in the US.

 

 

[SlowAppreciation]

The valuation seems insane, no?

 

Here the latest note from the DiningStocks.com research service:

 

"Shares of pizza giant Domino's (DPZ) are rising 2% today after reporting strong fourth quarter results. Same store sales rose an impressive 12.2% domestically and by 4.3% internationally. The company also provided average annual growth targets for the next three to five years that, if achieved, would be very impressive (6-8% system growth and 3-6% same store sales growth).

 

From a fundamental perspective, DPZ seems to have it all; a franchise-heavy model, global growth opportunities, economies of scale, great prices, and a focus on delivery. And yet we still stubbornly assign a "1" rating to the stock. Why? Because at the current $190 per share price, Wall Street is assigning a $9.3 billion equity value and $11.4 billion enterprise value to a company that in 2016 generated $230 million of free cash flow and $500 million of EBITDA. That equates to 23x EV/EBITDA and 41x free cash flow. Forget the dining sector, try finding companies in any sector that command that valuation. Off of the top of our head we know of none, though surely there are maybe a few dozen out there of the more than 3,500 publicly traded stocks.

 

Maybe we are simply missing something here, but we can only conclude that DPZ's fabulous stock run of the last four years (from $50 to $190 per share) is overdone. If we are right that the valuation is out of whack, we would expect underwhelming stock performance over the next five years as the business catches up with the stock."

 

I certainly don't disagree. But the business requires minimal capital, has decent growth opportunities, and seems pretty stable. So it's one to look at when there's turbulence in the markets.

[DooDiligence]

Anyone else read that piece and come away thinking Domino's should partner with Amazon for delivery?

 

“We’re delivery experts,” Maloney says. “If everyone becomes an expert, we’d have to figure out other ways to differentiate ourselves.”

 

Maybe pizza isn't their strong suit, although I'll admit they have made it a lot better than it was, but with all their stores and delivery drivers they just might have the best "last mile" delivery network in the US.

 

I love Domino's thin meatfest (DPZ may not be cheap but their pizza certainly is!)

 

USPS used to be best in the last mile but no more (at least not in my hood.)

 

Are you suggesting that Amazon could maybe hover drop a pizza at my place soon?

[Pelagic]

Anyone else read that piece and come away thinking Domino's should partner with Amazon for delivery?

 

“We’re delivery experts,” Maloney says. “If everyone becomes an expert, we’d have to figure out other ways to differentiate ourselves.”

 

Maybe pizza isn't their strong suit, although I'll admit they have made it a lot better than it was, but with all their stores and delivery drivers they just might have the best "last mile" delivery network in the US.

 

I love Domino's thin meatfest (DPZ may not be cheap but their pizza certainly is!)

 

USPS used to be best in the last mile but no more (at least not in my hood.)

 

Are you suggesting that Amazon could maybe hover drop a pizza at my place soon?

 

Or Domino's could show up at your door with $75 of crap you don't need and forgot you bought last night, spend $50 or more and you get a free pizza.

[ccplz]

Anyone look at the Australian Domino's (DMP)?

[atbed]

Where's the value? Are you seeing 20% growth long term or?

 

I didn't say it was priced below intrinsic value. I just think it's a good company with attractive characteristics/economics. So just sitting on the sidelines hoping that Mr. Market eventually gives me a fair price.

 

Feel like everyone including myself has just been waiting for that pullback ha. It has been an amazing turnaround

[tombgrt]

http://kc-roi.com/blog/delivering-on-the-300-hour-rule

[tombgrt]

Just want to add that businesses focussing on reputation and customer centricity are much more likely to be tomorrow's winners. No use in hiding shitty practices. Look at the United shit storm etc.

 

Food delivery should also only gain market share in the future as technology matures, people get richer and start seeing cooking (and shopping for food) as a time consuming luxury, IMO.  Growth might even accelerate for some. Haven't read any research on this but that is just my gut feeling and looking at the recent successes of Deliveroo, Blue Apron, etc.

[atbed]

International comp decelerated dramatically. Maybe it is a temporary phenomenon.

 

I think the transition from pizza to everything Italian won't succeed as well internationally. Pasta, salad and other non-pizza offerings are quite common in pizzerias across the U.S.; so key Domino's innovations are focused on food that's familiar here and sold by most independent competitors. But broadly the same dynamic is not the case outside the U.S..

 

Always tempted to pick up a few shares on a pullback like this

[KCLarkin]

Surprised there's no thread yet, but the company has healthy FCF, low CapEx requirements, and attractive economics for franchise owners. For those interested, there's a good read in Bloomberg

 

Wow, did you ever under-sell this one. The economics of this business are insane. This is a company returning >>100% of FCF to shareholders while organically growing earnings 20% per year.

 

Just starting a deep dive on this but this is surely one of the best businesses in the world.

[Morgan]

It will be interesting to see how fast casual pizza makers. Mod Pizza and Blaze Pizza will do compared to Dominos and Pizza Hut.

 

I recently ate at Blaze Pizza and it was the best tasting pizza I've ever had, and I eat a lot of pizza. It was seriously good. The atmosphere was cool too. And only $8!! $8?? I would have paid $12-15 for the same pizza.

 

I hope Blaze comes to my town. I'll be there constantly.

 

DPZ seems way overpriced and has serious competition.

[KCLarkin]

DPZ seems way overpriced and has serious competition.

 

Are you saying the stock is overpriced or the pizza?

[Morgan]

DPZ seems way overpriced and has serious competition.

 

Are you saying the stock is overpriced or the pizza?

 

Sorry - the stock seems overpriced. 

[KCLarkin]

Sorry - the stock seems overpriced.

 

P/E ratio is a function of growth, ROIC, and cost of capital. I think if you ran the numbers (taking management 5 year projections), you would find that DPZ is actually undervalued. But I need to run to the airport, so I don't have time to do the calculations.

 

By saying it is overpriced, I think you are implicitly saying the growth is unsustainable. You might also be unaware of how high the ROIC is for DPZ.

[KCLarkin]

Sorry - the stock seems overpriced.

 

P/E ratio is a function of growth, ROIC, and cost of capital. I think if you ran the numbers (taking management 5 year projections), you would find that DPZ is actually undervalued. But I need to run to the airport, so I don't have time to do the calculations.

 

By saying it is overpriced, I think you are implicitly saying the growth is unsustainable. You might also be unaware of how high the ROIC is for DPZ.

 

I took a quick run at this. I can make a pretty convincing case that this is worth $200-$230 if you trust the 5 year outlook. Fairly valued with little margin of safety. Looks attractive relative to SPY though.

[SlowAppreciation]

 

P/E ratio is a function of growth, ROIC, and cost of capital. I think if you ran the numbers (taking management 5 year projections), you would find that DPZ is actually undervalued. But I need to run to the airport, so I don't have time to do the calculations.

 

 

I haven't followed too closely as of late, but what's the projected growth rate from management?

 

By saying it is overpriced, I think you are implicitly saying the growth is unsustainable. You might also be unaware of how high the ROIC is for DPZ.

 

Yeah it was north of 60% when I looked, and honestly, the company requires very little capital to expand. It's simply a great business.

 

[SlowAppreciation]

Surprised there's no thread yet, but the company has healthy FCF, low CapEx requirements, and attractive economics for franchise owners. For those interested, there's a good read in Bloomberg

 

Wow, did you ever under-sell this one. The economics of this business are insane. This is a company returning >>100% of FCF to shareholders while organically growing earnings 20% per year.

 

Just starting a deep dive on this but this is surely one of the best businesses in the world.

 

What's your read on the CEO leaving?

 

Also, came across this a few months back which I think is worth mentioning: https://www.wsj.com/articles/how-dominos-convinced-wall-street-to-lend-to-them-for-less-1507739797

[KCLarkin]

I haven't followed too closely as of late, but what's the projected growth rate from management?

 

8-12% annual retail sales growth over next 3-5 years.

[SlowAppreciation]

https://www.eater.com/2016/9/30/13123448/dominos-online-delivery-startups

[KCLarkin]

8-12% annual retail sales growth over next 3-5 years.

 

Given the strategy, the growth targets seem reasonable. The question is how much EPS grows when revenue growth is 10%. There should be significant operating leverage -- since most of the variable costs are paid by franchisees. DPZ could also buy up to 5% of the float per year, if the stock price is reasonable. So 15-20% EPS growth seems likely. And DPZ only earns $280M per year. So above average growth for many, many years seems possible.