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Do you love pizza as much as I do? Well, I think I've found an investment that's as tasty as a fresh made-to-order slice of pie. For today's "11 O'Clock Stock," let's dig in to Domino's Pizza (NYSE: DPZ).

Domino's fast facts

Market Cap

$757 million

Revenue (TTM)

$1.5 billion

Earnings (TTM)

$89 million


$29 million / $1.5 billion


Papa John's (Nasdaq: PZZA), Yum! Brands (NYSE: YUM)

Source: Capital IQ, a division of Standard & Poor's.

We love pizza
I'm from New York and I love pizza. But I'm not the only one. We all seem to be a bit enamored of the little circle of wonder. In fact, pizza is a $34 billion-per-year business. To put this in some context, research shows that every man, woman, and child eats an average of 46 slices, or 23 pounds, of pizza each year. The delivery business represents about 26% of the total, and with a market share of about 18%, Domino's qualifies as the king of the delivery space.

Domino's operates a network of almost 9,100 franchised and company-owned stores in the United States and more than 60 international markets.

Three reasons to love Domino's

1. Revamped pizza recipe and expanded menu have re-energized the company
I'm sure you've seen the relatively new commercials highlighting the completely revamped pizza recipe and the expanded menu at Domino's. This new direction has worked perfectly for the company and has helped to significantly turn around the lackluster results for its domestic stores. Evidence of this is the latest quarter's U.S. same-store sales growth of 8.2%.

2. Significant international expansion opportunities
Much of Domino's growth is expected to come from its international operations, which have consistently generated strong results. The company's international stores (more than 4,000 stores) have posted 66 consecutive quarters of same-store sales growth. About 3,000 stores are concentrated in Domino's top 10 international markets such as Mexico, the United Kingdom, Australia, and South Korea. Management believes it can grow its top 10 international market total to 5,200, representing growth of about 75%.

3. Franchise model generates nice cash flow with minimal capex requirements
When done right, a franchised business model can be a thing of beauty. Domino's operates a large network of restaurants and collects a royalty stream from each. As a result, the business requires only minimal capital expenditures to operate.

Domino's U.S. franchises pay a 5.5% royalty based on the store's top-line sales, and the international franchises pay a 3.5% royalty. These franchise agreements typically extend for 10 years at a time. Furthermore, Domino's operates a successful supply chain division that ensures quality and consistency across the product line, leverages its purchasing power, and allows Domino's to pass through rising commodity costs to its franchisees. These supply-chain agreements also typically run for 10-year periods and allow for a 50% profit sharing agreement with the franchisees.

A little spicy
Domino's has a significant amount of debt, $1.5 billion to be exact. Profitability is sufficient to handle the interest payments, but a severe downturn in the business could cause some trouble. The company is committed to paying down this debt and has been making some good strides to do so.

Also, we need to keep an eye on the rising costs of cheese and wheat, two major components of pizza. Although Domino's can pass on much of these costs to its franchisees, I'd be concerned if increased raw material costs started eating into the profits of the stores, putting pressure on the franchises and making them less profitable.

Foolish bottom line
As the leading pizza delivery company, Domino's is well-positioned to continue to reap the profits of this large market. I'm impressed with the domestic turnaround and the strong international results. I think the international division will continue its strong growth trajectory. As long as the economy holds up, I think Domino's will continue to increase its free cash flow generation, and the stock could fetch about $17 per share, which translates to 25% upside from current levels.

Previous recommendations:

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