Domino's (DPZ 2.39%), fondly known as the pizza delivery expert, has not only pleased its customers with great taste, but also investors with massive returns. Its stock has almost doubled over the past 12 months as a result of sustained growth in earnings and increased confidence of investors. Domino's has also created reasonable value for shareholders by ensuring a consistent dividend policy.
Specialization and expansion are the key drivers
When a company operates in a highly competitive industry, it can sustain and grow only by creating a separate identity for itself (advice I have gotten throughout my life). Well, Domino's has successfully implemented this dictum by becoming the go-to chain for offering unparalleled service when it comes to pizza delivery.
The company's strength was clearly visible in its second quarter results , wherein it reported EPS of $0.57, up 21.3% over the prior-year quarter. Its international division reported same-store-sales growth of 5.8%. Another thing that has aided Domino's growth is its aggressive expansion strategy. Consider that the international division of Domino's grew by a whopping 101 stores in the second quarter alone.
Hiccups in certain countries
While I appreciate Domino's aggressive expansion, the performance of some of its franchises in major countries is worrisome. Reportedly , a couple of directors in Domino's UK offloaded sizable stakes in the company preceded by the CFO dumping shares. While personal reasons couls explain the insider sales, the company's weak results in the first half of the year could've propelled these executives to exit at a higher valuation.
In India, Jubilant Foodworks, which runs the Domino's franchise reported a massive decline in the growth of same-store sales from 22.3% to 6.3% in the first quarter . In order to beat the slowdown in demand, Jubilant introduced new products as well as entered new regions.
Though the stock has not been punished in the U.S because of the news, a continuing phase of poor results would definitely have a substantial effect on Domino's business. Since the company is highly leveraged with long-term debt of approximately $1.52 billion (as of June 16), a decline in revenue would mean less value for shareholders. If we consider this scenario in simple numbers, Domino's free cash flow is approximately 1/4 of its debt, while its current ratio is at 1.32. Though the company is not facing a serious liquidity crisis, it sure has to generate more cash going forward to justify the enormous debt taken for financing operations.
Papa John's is as good as Domino's
The investors of Papa John's have a big reason to smile as the company delivered outstanding results in Q2, with net income of $17.2 million or $0.77 per share. As a result of consistent quality and strong presence, Papa John's successfully beat consensus EPS estimate of $0.69 per share in the second quarter.
Only on the basis of certain technical metrics, Papa John's (PZZA 4.18%) portrays a better picture than Domino's with a current ratio of around 1.5 and total long-term debt of around $0.13 billion. One of the arguments that surfaces in this regard is Domino's store count and presence across a wide range of markets.
Earlier, Papa John's was not in favor of investing huge amounts of money in promotion, but with the increasing competition it has picked up the pace in advertising. Recently it was crowned as the brand most identified by NFL fans as an NFL sponsor . To add to the celebration, it was also ranked #1 in customer satisfaction in America .
Even though the company lacks humongous international presence, this data surely conveys its herculean power in the U.S., and I think that this lack of wide presence is more of a growth opportunity than a negative point. Papa John's consistent record for delivering strong results and a ton of opportunities ahead make it a ripe investment.
Yum! Brands does have some problems
Yum! Brands (YUM +2.16%), the holding company of popular brands like KFC and Pizza Hut has been facing constant issues with its KFC brand in China. The media in the region has tainted the brand for using illegal drugs for fattening chickens as well as other allegations. While Yum! has made all efforts to meet quality standards in order to sustain growth in this key market, it has limped on ever since the first allegation. Yum! has also not been the best investment for investors as it churned out total returns of just 11.8% over the last year compared to the S&P 500's total return of 24.7%.
Apart from low returns, another downside to this stock is volatility. A look at its share price movement reveals a high frequency of swings in the last 12 months with a net capital appreciation of just 11%. Thus, an investor is better off investing in a stable dividend-paying stock like Domino's rather than Yum!
Domino's is the obvious choice
A few months back I read an article on how the CEO of Domino's India franchise designed the entire delivery system in order to deliver pizzas efficiently and without violating the legislation of the country. It is this planning and dedication that has helped this company in becoming the pizza delivery champion across the globe. This title that Domino's has earned is a huge advantage that will continue to pay off handsomely in the future.
To conclude, I am not asking investors to disregard certain concerns over the financial health of the company or the challenges it is facing in big markets. Domino's is a fundamentally strong company that has effectively tackled competition to sustain value for shareholders, which is the primary reason that one should take a harder look at it as an investment in this industry.
