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DPZ Stock Study (5-16-23)

I recently did a stock study on Domino’s Pizza Inc. (DPZ) with a closing price of $307.85.

CFRA writes:

     > Domino’s is a fast-growing restaurant company and the largest
     > pizza company in the world, it has more than 18,800 locations,
     > primarily in the U.S. and Canada. The company is primarily a
     > franchisor, with only 2% of stores being company owned. DPZ
     > has three reportable segments, which include U.S. stores,
     > international franchises, and supply chain operations.

Over the last 10 years, this medium-size company has grown sales and earnings at annualized rates of 11.7% and 23.3% per year, respectively. Lines are mostly up, straight, and parallel except for declining earnings in ’22. PTPM over the decade has been up and down within a narrow range of 12.5% (’13 and ’18) to 14.4% (’17 and ’21) with a last-5-year average of 13.3%. This is higher than peers but lower than industry averages.

Over the last decade, ROE has ranged from d15.2% (’20) to d9.0% (’17) with a last-5-year average of d12.3%. Yes, those are all negative numbers that are less than peers in 8 out of 10 years. The industry posted positive ROE in 5 of 9 years. Although strange, one other well-known company that carries an ongoing shareholders’ deficit [rather than equity] is SBUX.

Over the last 10 years, Debt-to-Capital has ranged from 412% (’20) to 754% (’17) with a last-5-year average of 516%. This soars high above peer and industry averages. Without doing further research, one thing I find strange is that leverage often boosts ROE; here, leverage is enormous and ROE is negative. Two more yellow flags are Interest Coverage and Quick Ratio at 3.9 and 0.74, respectively.

M* does not seem worried about the debt load. About the “average” balance sheet, the analyst report writes:

     > Strong FCF offers more than adequate coverage [preventing the
     > company from meaningful default risk]… staggered debt maturities
     > over the next three years show a negligible amount of principal
     > coming due over the next three years… a flexible net debt/EBITDA
     > target of 3-6 times designed to minimize the firm’s cost of capital
     > based on prevailing market rates and interest deductibility [is] a
     > shareholder-friendly strategy that encourages management discipline.

M* gives DPZ an Exemplary rating for Capital Allocation [along with Wide/Stable Economic Moat]. Value Line does not mention debt at all in its most recent [5/19/23] commentary and rates the company A for Financial Strength.

Anecdotally, DPZ seems to have a wealth of analyst coverage for a medium-size company. If debt were a huge problem, then I think it would be difficult to hide.

For those concerned, look no further than the company’s own 10-K under “Additional Disclosures/Risks Related to Our Indebtedness” for an extensive discussion of everything that could possibly go wrong due to a highly leveraged balance sheet.

I forecast long-term annualized sales growth of 6% based on the following:

I am forecasting less than the two long-term estimates.

I forecast long-term annualized EPS growth of 9% based on the following:

I am forecasting below the long-term-estimate range (mean of six: 12.1%). To be conservative, I am projecting from the ’22 EPS of $12.53/share rather than Q1 ’23 EPS (annualized) of $12.97/share.

My Forecast High P/E is 25. Over the last 10 years, high P/E has trended up from 28.7 (’13) to 45.1 (’22) with a last-5-year average of 38.1. I am projecting conservatively below the entire range (5-year-average average P/E is 30.5).

My Forecast Low P/E is 19. Over the last 10 years, low P/E has ranged from 17.7 (’13) to 26.8 (’15 and ’17) with a last-5-year average of 23.0. I am forecasting near the bottom of the range (only ’13 is lower).

My Low Stock Price Forecast (LSPF) is the default value of $238.10. This is 22.7% less than the previous close and 18.2% less than the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 25.2% in ’20 to 35.7% in ’15 with a last-5-year average of 28.3%. I am forecasting conservatively at 25.0%.

These inputs land DPZ in the HOLD zone with an U/D ratio of 2.8. Total Annualized Return (TAR) is 10.4%.

PAR (using Forecast Average–not High–P/E) is 7.8%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can focus on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 85 studies done in the past 90 days (15 outliers plus my study excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.8%, 10.3%, 30.1, 22.5, and 28.3%. I am lower across the board. Value Line projects a future average annual P/E of 25.0: lower than MS (26.3) and higher than mine (22.0).

With regard to other data, MS high and low EPS are $20.92/share and $12.54/share in contrast to my $19.28 and $12.97. My high EPS is lower due to a lower EPS growth rate. MS LSPF of $273.80 implies a Forecast Low P/E of 21.8 (versus the above-stated 22.5), is 15.0% greater than mine, and is just 3.0% less than the $12.54 * 22.5 = $282.15 default.

Shares are a BUY under $305 given an apparently healthy MOS in this study, but two things still give me pause. First, I want TAR closer to 15.0%. Second, the high debt load [albeit an inextricable component of the business model] makes me uncomfortable since some investment club guidelines prohibit it.

I will look to re-evaluate this stock under $295/share.

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