What: Shares of pizza chain Domino's Pizza (NYSE:DPZ) inched fractionally higher by $0.07, or 0.1%, in Thursday's trading session to close at $104 on the dot despite receiving a nice bump up in its price target from research firm Argus following the company's earnings release earlier in the week.
So what: John Staszak, the covering analyst at Argus, stood pat on his firms' "buy" rating on the company but boosted its price target, or perceived fair valuation, to $120 from $110. The argument he laid laid out is that Domino's is taking market share from smaller pizzerias and mom & pop restaurants and has the scalability in overseas markets to push its share price higher.
Staszak specifically focused on Domino's efforts to boost its international store count – international same-store sales growth has increased in 84 consecutive quarters – and its ability to boost its restaurant margins as reason to believe it'll head to $120. Argus' forecast calls for Domino's to expand its operating margin 20 basis points to 17.5% in 2015 from the 17.3% it reported in 2014.
As a refresher, in case you missed the Tuesday morning earnings release, Domino's Pizza reported a 13.5% increase in fourth-quarter net sales, highlighted by an 11.1% increase in domestic same-store sales growth. The company wound up opening 662 net stores internationally in 2014, but its Q4 EPS of $0.91 actually missed the consensus estimate by $0.02 as selling, general and administrative expenses were higher than analysts had anticipated. As CEO Patrick Doyle noted in the press release, "Fundamental strength with a growing global store base, robust sales and technology innovation" are what continue to drive Domino's Pizza.
Now what: In spite of another tasty quarter, investors have to wonder if this pizza pie actually has the right ingredients to head 15% higher and hit $120.
On one hand it's really difficult to argue against what Domino's has done in six seemingly short years. Following a successful mea culpa campaign where Domino's admitted its pizza "just wasn't that good," the company went back to the drawing board and changed its recipe. The result has been a much more satisfied customer. Additionally, Domino's focus on reaching millennials through social media and "Siri"-like ordering apps appears to be paying off. As should be no surprise, Domino's ranked first in Brand Keys' latest brand loyalty rankings in the pizza category.
But, there's another side to this story. Fundamentally Domino's is arguably already fairly valued. Even with double-digit same-store sales growth in domestic markets, Domino's is valued at 27 times forward earnings and is sporting a PEG ratio just slightly above two. For those unfamiliar, a PEG ratio above two is occasionally a valuation red flag, but it also depends on the company and the industry.
To answer the question of whether Domino's Pizza can head higher, investors just really have to ask themselves whether or not they believe Domino's share of the global pizza market is going to keep rising. Considering the two-decade-long success of its international stores and its U.S. momentum I'd contend that there's a growing floor underneath Domino's shares. In other words, further upside is certainly possible in Domino's, and downside seems somewhat limited due to its strong growth, but investors would be wise to temper their expectations and their timeline for when Domino's might hit $120.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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