What happened
Shares of Domino's Pizza (DPZ 0.87%) got a big boost from an analyst at Stifel on Wednesday night, and the shares are reacting positively Thursday morning -- up 6.3% through 11:45 a.m. ET.
The investment bank's Chris O'Cull upgraded shares of the pie master from neutral to buy and raised his price target on Domino's stock to $350 a share, implying that even after today's rally, there's still another 7% or 8% upside in the stock -- on top of a 1.6% dividend yield.
So what
O'Cull noted that Domino's shares have "performed poorly" in recent years -- indeed, Domino's stock is down 19% in a market that is up 19% over the past year. The analyst attributed these declines to waning demand for take-out food in the wake of the pandemic, noting that "delivery sales have declined, franchisee profitability has fallen, and unit growth has slowed," says a report on the upgrade from StreetInsider.com.
That being said, O'Cull's of the opinion that delivery sales will stabilize for Domino's over the next year, and with carryout sales still growing, this could lay the groundwork for a resumption of revenue growth going forward. And combined with expected lower commodity costs and higher labor productivity, this should in turn lead to profits growth.
Now what
And yet even O'Cull admits he might be a bit early on this call. Domino's Q2 earnings report is due out July 19, but the analyst cautions that even a month out from today, it may still not be evident whether delivery sales are stabilizing -- leaving open the potential for further losses in the stock.
Considering that at today's prices, Domino's stock still sells for 23 times earnings and 25 times free cash flow -- and looks even more expensive with its $5.1 billion in net debt factored into the mix -- I see no compelling reason to rush in and buy the stock simply because Stifel thinks it might recover a year from now.
Even 19% cheaper than it was a year ago, Domino's Pizza stock is still not cheap enough to buy.
