We came across a bullish thesis on Domino’s Pizza, Inc. (DPZ) on Do Not Distribute’s Substack by Ali Gündüz. In this article, we will summarize the bulls’ thesis on DPZ. Domino’s Pizza, Inc. (DPZ)’s share was trading at $453.35 as of Nov 22nd. DPZ’s trailing and forward P/E were 27.86 and 25.64 respectively according to Yahoo Finance.
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Domino’s Pizza (DPZ) has established itself as a highly profitable company with a strong growth trajectory, driven by a unique business model and operational efficiency. The company has four main sources of income: retail sales from company-owned stores in the U.S., royalties and fees from U.S. franchisees, a 50/50 profit share from its supply chain in the U.S. and Canada, and royalties from international master franchisees. Each of these income channels has varying levels of profitability, with retail sales from company-owned stores being the least profitable, while royalty payments from franchisees are almost pure profit. Domino’s performance is assessed not by its revenue but by system sales, from which it earns a consistent 10% commission on U.S. retail sales and 3% on international sales, forming the bulk of its gross profit. Over time, the company has successfully reduced its corporate expenses, allowing an increasing share of gross profits to flow to the bottom line, resulting in solid earnings growth supported by strong cash flows.
Domino’s future earnings growth depends on answering three critical questions: Can it continue to grow domestically, can it expand internationally, and can it manage its debt effectively? Domestically, the company is well-positioned, controlling nearly half of the U.S. pizza market and continuing to capture a larger share of it. It has managed to double both its market share and retail sales over the past decade, despite only holding a quarter of the market. To sustain domestic growth, Domino’s focuses on three main initiatives: expanding its carry-out business, enhancing its store density through “fortressing,” and continuing its technological innovation in both its in-store and consumer-facing tech stack. These strategies aim to deliver more convenience, consistency, and value to customers, driving demand.
Internationally, Domino’s has enjoyed success with its master franchise system, expanding into both developed and developing markets. Although some recent results in developed countries, particularly Japan and France, have been disappointing, the company still has significant growth potential in many markets where it is a small player. With rising consumer purchasing power in developing countries and strong brand positioning, Domino’s expects to continue expanding globally, albeit at a potentially slower pace than previously anticipated.
Regarding its debt, Domino’s has leveraged a significant amount of borrowing over the past decade to fund share buybacks, reducing its share count significantly. This strategy, while risky, has driven substantial earnings growth, with financial leverage playing a major role in increasing EPS. Despite the risks associated with high debt, including the impact of rising interest rates, Domino’s has managed to maintain a manageable leverage ratio, with a net debt-to-EBITDA ratio of 4.8x as of Q3 2024. The company’s ability to refinance its debt in the face of large maturities is supported by its strong and growing cash flow, and its management has been able to balance capital allocation effectively, even during challenging periods.
Domino’s Pizza remains a highly attractive investment opportunity, thanks to its strong market position, consistent profit growth, and innovative approach to both operations and capital allocation. The company’s robust business model, combined with its ability to adapt to changing market conditions, positions it well for continued long-term success.
Domino’s Pizza, Inc. (DPZ) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 32 hedge fund portfolios held DPZ at the end of the third quarter which was 52 in the previous quarter. While we acknowledge the risk and potential of DPZ as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DPZ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.