Shares of popular pizza chain Domino’s Pizza (NYSE: DPZ) have been under significant selling pressure for most of the year. The stock nearly got sliced in half, falling more than 45% from peak to trough before its recent relief bounce. Undoubtedly, Domino’s was one of the pandemic-era winners that surrendered most of its 2020-21 returns. Unlike most other pandemic heroes, Domino’s Pizza looks more like a “growth at a reasonable price” (GARP) play. Further, the high-growth pizza chain is more than capable of seeing new highs within the decade.
Though the economic climate has changed, Domino’s is still on the growth track. For that reason, I am bullish on the stock.
Domino’s Pizza Stock: The Epitome of Growth at a Reasonable Price
Domino’s stock seemed unstoppable in the pandemic’s earlier days. The company was built to thrive in an era of widespread lockdowns, with its top-notch delivery capabilities, a focus on serving quality at fairly reasonable prices, and a recipe revamp that’s found a spot with consumers. With pandemic gains mostly surrendered, Domino’s seems like a very compelling value and growth option heading into a recession year.
At writing, the stock trades at 27.3x trailing earnings and 2.7x sales – not exactly a bargain, but a very reasonable multiple to pay for such a high-quality growth firm that’s done a stellar job of executing over the years. With a 0.69 beta, Domino’s stock is likely to act less choppy than the broader averages.
Though Domino’s stellar margins could take a bit of a hit as consumers tighten the purse strings, the international growth story and cutting-edge ordering tech still make the firm a quality company to own once the market’s ready to move on.
At today’s valuations, far too much emphasis is placed on headwinds, those in the rear-view (inflation) and up ahead (a recession).
Domino’s Feeling the Full Force of Headwinds
Fresh off a mixed bag of earnings (EPS came in shy of estimates at $2.79 vs. the $2.97 consensus estimate), investors seem to be bracing for a recession just as the firm looks to overcome inflation pressures. From inflation to a recession, the headwinds could continue to weigh on DPZ and various restaurant brands that aren’t known for their “value” menus.
Commodity costs (think pizza toppings), inflation, and wage pressures (tied to labor shortages) are transitory issues that weighed on the latest results. With store traffic soft relative to its restaurant rivals, it seems like Domino’s could risk losing share to its fast-food peers.
Indeed, DoorDash (NYSE: DASH) and food-delivery companies have made it such that pizza is no longer the only option for those looking to get a hot meal brought to them. Everything from fried chicken to burgers can now be brought to one’s doorstep within the hour. Though pizza may have lost its luster on a relative basis, Domino’s remains a juggernaut in the pizza market. Further, the company has the opportunity to improve upon its “value” stance as it looks to retain margins and its standards for quality.
New product items — like Oven-Baked Dips, Baked Apple Dip, and other sides — introduced in recent years could reignite Americans’ hunger for pizza again. Rival Pizza John’s (NASDAQ: PZZA) has really stepped up its game on the menu innovation front with Papadias (its Calzone offering).
Such smaller and lower-cost items are more novel and could help the pizza chains fare better in a year where consumers chase value. Further, carryout may be a strong point for Domino’s, as consumers look to save on delivery fees and tips.
Undoubtedly, Domino’s hasn’t been as resilient as some of its restaurant peers. A renewed focus on value and menu innovation could help Domino’s better sail through a recession storm. As inflation pressures and labor woes come to pass (hopefully in the back half of 2023), I expect the firm to return to growth mode as it looks to drive same-store sales while expanding across the globe.
Is DPZ a Good Stock to Buy, According to Analysts?
Turning to Wall Street, DPZ stock comes in as a Hold. Out of 20 analyst ratings, there are seven Buys, 11 Holds, and two Sells. The average Domino’s price target is $369.61, implying upside potential of 3.3%. Analyst price targets range from a low of $315.00 per share to a high of $430.00 per share.
Takeaway: DPZ Stock Looks Good at Current Prices
DPZ stock is 36% off its highs, making it a compelling pick-up for bargain hunters seeking GARP.
Domino’s is a powerful brand and a top pizza play that will live to see better days. Further, the firm would make for a compelling takeover target for a restaurant-holding company hungry for a slice of the lucrative pizza market.