If one benefit exists should a much-feared recession materialize, it’s that comfort food providers such as Domino’s Pizza (NYSE:DPZ) could potentially deliver profits for stakeholders. Essentially, as consumers pivot their purchasing behaviors to lower-cost alternatives, Domino’s stands to benefit. Therefore, I am cautiously bullish on DPZ stock. However, this transition may be bad news for everyone else.
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On paper, those who anticipate severe economic challenges on the horizon may want to target the fast-food industry. As the COVID-19 crisis proved, consumers rarely go cold turkey on their purchasing behavior due to a financial disruption. Rather, they trade down their spending habits until they reach an equilibrium between quality and price.
So, back during the worst of the pandemic, interest in recreational vehicles skyrocketed. It’s not that people simply axed their vacation plans. No, many clearly wanted to enjoy their free time. However, instead of taking that pricy trip to Paris, they opted to take domestic road trips to national parks, and this same principle can bolster DPZ stock if the economy falls into recession.
More than likely, investors won’t see consumers stop spending money on restaurants altogether. As an alternative, they will seek cheaper options. In this regard, it’s tough to beat Domino’s. From the serotonin-catalyzing aroma to the filling nature of its high-carbohydrate content, pizza represents one of the tempting comfort foods.
Fundamentally, that’s great news for DPZ stock. Unfortunately, it might also be a harbinger for the rest of the economy.
Domino’s Soaks Up the Addressable Market
On surface level, it might sound strange that bullishness toward DPZ stock might signal harm for the rest of the consumer economy. However, this narrative centers on the concept that Domino’s may soak up the addressable discretionary market.
Back during the Great Recession, an ABC News report from December 2010 noted that pizzerias thrived amid the slumping economy. Naturally, affordable pricing represented the main driving factor. With a large pizza or two, a family of four can enjoy a filling meal while the parents take a much-needed break.
In addition, people feel a need to splurge every now and then. The only difference with a recession is that consumers will downgrade the magnitude of the splurging. Therefore, DPZ stock should relatively easily benefit if another recession occurs. Basically, it’s not convenient to trade down from Domino’s, as the cheaper alternative is buying frozen pizza at the grocery store.
Logically, though, if Domino’s continues to enjoy its recession-resistant status, other businesses may struggle. For instance, premium restaurants will face severe credibility threats. Even trendy fast-casual restaurants may suffer because Domino’s would offer a better bang for the buck.
Plus, the impact doesn’t need to revolve solely around food. For instance, consumers may avoid attending the big game in person, choosing instead to order pizza and watch from home. In this case, DPZ stock will benefit. However, watching TV at home would negatively affect the entire consumption value chain of people attending live events.
For DPZ Stock, the Numbers Don’t Lie
Supporting the case for DPZ stock – and simultaneously undermining optimism for others – are the hard numbers. In 2020, Domino’s represented one of the few businesses that posted sales growth against the prior year. It was a conspicuous performance, too, with the company generating $4.12 billion in sales against 2019’s tally of $3.62 billion.
Not only that, Domino’s continued to charge ahead, posting sales of $4.36 billion in 2021. On a trailing-12-month basis, the company is looking at revenue of $4.49 billion. Again, that’s great news in the long term for DPZ stock.
On the other end of the scale, though, Ruth’s Hospitality (NASDAQ:RUTH) – which owns Ruth’s Chris Steak House – is finally on pace to beat its 2019 revenue tally. If a recession occurs now, Ruth’s might face serious viability challenges. Diners can always trade down during hardships.
It’s an entirely different matter, as Domino’s robust revenue trend confirms, to trade up. Therefore, DPZ stock may win during the troubles. Sadly, the same cannot be said with confidence for many other businesses.
Is DPZ a Good Stock to Buy, According to Analysts?
Turning to Wall Street, DPZ stock has a Moderate Buy consensus rating based on six Buys, five Holds, and one Sell rating. The average DPZ price target is $384.18, implying 8.17% upside potential.
The Takeaway: DPZ Stock is the End of the Road
To reiterate, DPZ stock may be a solid stock to consider should you believe in an imminent recession. Historically, comfort food providers perform well during economic downcycles. However, if you find yourself reaching for Domino’s as an investment, it’s possible that other market segments have collapsed.
