My love of pizza is not all that different from Homer Simpson's love of Duff beer. Still, even I get a kick out of the lead sentence in Domino's Pizza's (NYSE:DPZ) third-quarter earnings report from Tuesday morning, in which the company says it is "the recognized world leader in pizza delivery." The statement makes me laugh, but I can't argue with it. I've enjoyed Domino's pizza delivery on three continents and have rarely had a problem. For pizza in a pinch, Domino's is pretty good, and it's just about everywhere.
With the stock up by more than 7% in midday trading, investors obviously believe that the company delivered strong results. Earnings per diluted share were $0.30, up 30% versus last year's performance, and total sales increased 3.9%. Domino's managed to increase its EPS more quickly than sales by driving better operating margins in the stores; reducing selling, general, and administrative (SG&A) expenses; and lowering interest expense.
Same-store sales were up across the board in the quarter. The international side of the business turned in the best performance, with a 4.5% increase on top of a strong 5.9% gain last year. The domestic stores, in contrast, turned in a meager 1.1% increase, but that's against a very strong 8% gain a year ago.
Domino's still maintains a large amount of long-term debt on its balance sheet, but its ability to fund that debt seems solid. Its free cash flow through the first three quarters of the year is strong, and its interest coverage ratio (earnings before interest and taxes divided by interest expense) in the most recent quarter improved to 3.89 from 1.66 in the same quarter last year.
With a trailing P/E of around 21, the valuation for Domino's is not all that different from that of competitors Papa John's International (NASDAQ:PZZA) and Yum! Brands (NYSE:YUM), which includes Pizza Hut, KFC, and Taco Bell in its stable of brands. The valuations of the group aren't terrible, but I'm not yet intrigued enough to invest my own funds. Still, at 1.9%, Domino's does sport the highest dividend yield of the group, and, given the potential for reasonable dividend growth in the future, the yield is looking pretty tasty.
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Nathan Parmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
