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Why I'm Watching Domino's Pizza More Closely

By Will Healy – Apr 22, 2020 at 8:50AM

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Domino's is better-suited than most restaurant chains for today's coronavirus-influenced business environment.

Domino's Pizza (DPZ -1.53%) stands out as the restaurant industry deals with perhaps the most significant challenge it has faced in recent history. The COVID-19 pandemic has limited most restaurants to takeout and delivery only. This has devastated an industry that heavily depends on sit-down customers.

However, as a business that is oriented toward delivery, Domino's has managed to remain steady in an environment where some restaurants had to shut their doors for the duration of this lockdown. Moreover, with a vaccine for coronavirus months or years away, many customers will likely stay home even as sit-down restaurants are finally permitted to reopen fully. For this reason, investors need to not only watch Domino's stock but also learn how the company can serve as a potential model for recovery across the restaurant industry.

Man in a red shirt and baseball cap delivering two boxes of pizza to a brown-haired young woman wearing gray.

Image source: Getty Images

Domino's should rise as its industry gets burned

Put simply, Domino's is a restaurant business built for lockdowns. I doubt that founders Tom and James Monaghan had pandemics in mind when they opened the first Domino's in 1960. However, the current crisis has them positioned better than most other restaurants. Since they never ran a sit-down restaurant, their company has dealt with lower levels of lost business during the pandemic.

Consequently, Domino's stock price has performed comparatively well this year. Right before fear gripped the market, the stock surged 24% in a single day as the company handily beat revenue and earnings estimates for its fourth quarter of 2019. Soon after, Domino's gave back most of that gain in the general market sell-off. It then regained most of the losses when the market began to recover in late March.

DPZ Chart

DPZ data by YCharts

Given these recent highs, investors should pay attention to Domino's earnings. For revenue, analysts forecast that the company will bring in quarterly revenue of $868.67 million. This figure is 3.9% higher than revenue for the same quarter last year. Analysts also expect the company to report quarterly earnings of $2.32 per share.

If that number holds, it will represent a 5.5% increase from the same quarter last year. This number may appear lackluster compared to the usual double-digit earnings increases. Still, given the fact that many of the restaurant chain's peers will probably face massive declines, this performance seems more impressive.

However, this is one earnings report where investors need to also look beyond the numbers. The pandemic was a factor in the company's performance for less than one month of the quarter. Consequently, the $2.32 per share estimate for the last quarter fell by only $0.05 per share over the previous 90 days.

Still, looking toward the next quarter, analysts have slashed estimates by $0.20 per share over the last three months. Hence, investors may have to wait until July to see the full effects of COVID-19 on the business.

For this reason, investors need to see if the company offers any comments or forward guidance. Late last month, Domino's pulled its guidance for the year. This does not set it apart from many other consumer-discretionary stocks. However, if it resumes these estimates, it could indicate that some measure of predictability has returned.

Do not watch Domino's for Domino's sake

Despite its market position, investors may not want to watch Domino's with the purpose of buying Domino's stock, at least for now. The company supports a forward P/E ratio of 36.2. This takes the price-to-earnings-to-growth (PEG) ratio to almost 3.0. That comes in much higher than the average five-year PEG of around 1.9 for the company.

Still, a strong performance from Domino's could provide indications about how restaurant brands such as McDonald's and Yum Brands (the owner of Taco Bell, KFC, and Pizza Hut restaurants) may perform. Both of these restaurant chains maintain a substantial takeout business and also have delivery in many markets. Depending on what happens, these stocks may also offer a buying opportunity, as they trade at lower multiples than Domino's.

Domino's earnings could also provide some guidance for what sit-down restaurants, such as the ones owned by Brinker International or Darden Restaurants, need to do to recover. Even with restaurants beginning to reopen in some parts of the country, large segments of the population will probably isolate by choice for the foreseeable future. Hence, restaurants of all types may want to look at Domino's as a model for invigorating the takeout/delivery segment of their business.

In the midst of a pandemic, the Domino's business model positions the company to set trends in the restaurant industry for now. Though Domino's stock may appear expensive at these levels, its performance could set the path for other restaurant stocks to eventually recover.

Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Domino's Pizza. The Motley Fool has a disclosure policy.

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Domino's Pizza, Inc. Stock Quote
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