“Domino’s Pizza is beginning to deliver with a new recipe, great ad campaign, fabulous international business…” — CNBC’s Mad Money 1/13/2010
Domino’s Pizza (NYSE:DPZ) has recently unveiled a new recipe for their pizzas obviously in an effort to improve taste and also perception. Their national ad campaign promises more herbs and spices, better dough and a crust brushed with a garlic butter, etc. Domino’s had built an impressive franchise off of the classic-style pizza, and I would imagine few customers would argue it was anything better than an average pie. Their own commercial beats down the old pizza, and promising improvement. Having not tried the new style yet, I cannot comment on it but I am at least intrigued. The market is showing surprising bullishness towards Domino’s stock as it has risen an impressive 46% in the last month alone. The new recipe is providing a catalyst to get investors and analysts excited about the stock.
Television personality Jim Cramer discussed Domino’s last night on Mad Money, and he believes that this stock still has a lot of upside. He had formerly been a bigger fan of DPZ competitor Papa John’s (NASDAQ:PZZA) stock, but he is swapping his allegiance for Domino’s and recommends it as a buy. In his opinion, there are plenty of reasons to be excited about the stock beyond just improving the pizza. Domino’s has focused on international growth with 63 straight quarters of improved same store sales abroad, and now sales abroad account for 45% of the total. They are not finished growing internationally either, and management has committed to build more stores to grab market share. Domestically, Domino’s is the market share leader and continues to improve, thanks in large part to Pizza Hut’s (NYSE:YUM) horrible numbers recently (domestic same store sales fell 13% in the fiscal third quarter).
Following Cramer’s endorsement the stock is surging another 11% in Thursday morning trading. However, we continue to believe there is further for this stock to run over the longer term, which is why we have it as Undervalued. Even though the new pizza is generating a lot of attention and some analysts are upping sales targets as a result, we believe DPZ is attractive even without a meaningful bump to sales. Consider the fact that over the last ten years the market has been willing to pay 6.1x to 14.1x cash earnings, but the current price-to-cash earnings is only 5.3x. Additionally, current price-to-sales .4x is well below the historically normal range of .51x to 1.1x. For the stock to reach just the midpoint of the historically normal ranges would imply a price of around $18 based on current fundamentals. We do not assume that stocks will always revert to their normal valuations but we think the risk reward is certainly worth a look, even with the exceptionally high debt load.
The fundamentals of Domino’s are attractive and perhaps the fresh outlook on the product is just the spark that the market needed to recognize that underlying value. Thus far, it is hard to deny the market loves the new pizza, and it’s not too late for investors to grab some nice returns.