Investors are starting to believe in Domino's Pizza (DPZ 0.87%) again. The leading pizza delivery giant's stock price jumped following its late July earnings update that showed some encouraging signs around growth and profitability. Domino's is expanding sales in the core U.S. market, for example, and remains solidly profitable.
Those metrics don't put the company's rebound struggles behind it, and fast-food operators such as Chipotle Mexican Grill (CMG 2.41%) and McDonald's (MCD -0.91%) are still achieving better overall results in this selling environment while pushing into the delivery space. But Domino's is taking big steps back toward its high-performance days that generated excellent returns for investors. Let's take a closer look at whether that makes the stock a buy right now.
Sales trends
Overall sales were up 6% year over year through mid-June. But look a bit closer and you'll see some cause for concern. Domino's comparable-store sales rose just 0.1%, suggesting continued market share losses. McDonald's posted a 13% increase, in contrast, and Chipotle grew at a similarly strong pace.
Still, Domino's executives are glad to be back in the growth column right now, and their plan is to accelerate sales gains over the next several quarters with help from initiatives like the recent partnership with Uber Technologies' Uber Eats. "We are executing our plan to restore delivery growth in the U.S.," CEO Russell Weiner said in a press release.
That growth is helped along by Domino's aggressive plans for store expansion, which helps it stand out among large fast-food operators.
Making profits
Domino's profitability is strong and improving, forming a tasty pillar in the investing thesis for this stock. The company boosted operating income by 10% this past quarter thanks to factors like higher franchise fees and menu prices, plus slowing inflation for raw material costs.
MCD Operating Margin (TTM) data by YCharts
The fast-food company doesn't approach anything like the over 40% profit margin that McDonald's enjoys. But margins are comparable to Chipotle's, indicating a highly efficient business that can deliver volumes of food using a small restaurant footprint. Buying into the bullish thesis today means you believe Domino's can boost its earnings power over time through continuous improvements to its delivery platform, its food quality, and its market share.
The price check
Domino's shares are priced attractively right now, likely reflecting the pessimism on Wall Street about its short-term growth prospects. It doesn't maintain the same dominant position it once had in the delivery niche now that fast-food giants like McDonald's and third-party aggregators have made home delivery more widespread and convenient. Yet its deal with Uber Eats could help reverse some of those losses over the next few quarters.
The stock is valued at roughly 3 times annual sales compared to Chipotle's price-to-sales ratio of over 6. Restaurant Brands International, the owner of Burger King, is priced at about 5 times sales.
That discount makes sense right now given Domino's growth struggles. As a result, investors might want to keep this stock on their watch lists for signs that the company is returning to its prior path of consistent market share gains in the delivery and carry-out pizza niches.
