By Jacob Sonenshine
After a disappointing year, Domino's Pizza stock has underperformed the stock market in 2024 -- but now its shares look ready to deliver.
Shares of Domino's have gained 3.5% this year, underperforming the S&P 500 index's 25% rise. It isn't all the pizza maker's fault. Few restaurant stocks are having good years -- Chipotle Mexican Grill, up 35%, is an exception -- and many are having very bad ones, including Yum! Brands, owner of Kentucky Fried Chicken and Taco Bell; Papa John's International; and Burger King owner Restaurant Brands International. All told, the S&P 1500 Restaurant Sub Industry index has risen just 4.2% in 2024.
The industry's problems include declining traffic and waning pricing power as consumers become more choosy about where to spend their money. These challenges have bitten Domino's, too. Its same-store sales grew by just 1.5% year over year in the third quarter, down from 2.5% during the first quarter, and analysts expect the fourth quarter to come in below 2% growth for a second consecutive report, according to FactSet.
The good news is that Domino's poor performance appears to have resulted not from management missteps but economic pressures. Its U.S. same-store-sales growth has been anywhere from four to eight percentage points higher than the outright declines seen for Papa John's and Pizza Hut in the past three quarters, according to Evercore analyst David Palmer. He expects the same dynamic in the fourth quarter, when he predicts Domino's will deliver 2% U.S. comparable sales growth.
Domino's is also making deliveries easier for customers. It's joining with Uber Eats and DoorDash, which should allow it to reach more customers online through various platforms. The Uber launch has helped bring new customers to the brand, while the DoorDash program, which is expected to go live during the second half of 2025, should provide another boost.
Domino's own app, which allows customers to track food while it's on its way, has become increasingly accurate in forecasting delivery times. The result is that the app now has a few million monthly active users, several times the number for Pizza Hut, Papa John's, and Little Caesars, according to Evercore. The company can use all of the data it gains from the app to present the right menu options to each user.
"Domino's is a well-oiled machine," says Dan Ahrens, chief operating officer at AdvisorShares, which owns the stock. "Their app ordering technology [is] much more efficient than a few of their pizza segment competitors."
The key will be international markets. These stores, which are primarily located in Asia and Europe, make up 67% of Domino's base but have been hurt by sluggish economies overseas and a strong dollar, which results in lower sales when brought back to the U.S. The issue, however, is well known, and it's possible that some of these economies will begin to recover in 2025 as central banks cut interest rates and consumer spending rebounds in Europe. Domino's will also see easy comparisons going forward, thanks to the recent underperformance overseas.
"They should grow revenue, and there's a big international opportunity," says LRT Capital Management's Lukasz Tomicki, who is sticking with the stock.
Then there's Domino's Hungry for More strategy, initiated this year, which calls for the company to expand the store base by 5% annually, ultimately reaching about 25,500 by 2028, up from 21,000 now. It also sees Domino's investing in its franchises and technological advances. These initiatives have given management enough confidence to reiterate its long-term guidance for total revenue to grow at 7% annually, with margins likely to improve to 19% by 2027 from 18% this year even as the company ramps up marketing spend, as the cost of ingredients and hiring remain subdued.
With management recently spending about $250 million annually to repurchase stock, earnings per share could grow by 6% in 2025 and 10% in 2026, according to FactSet. TD Cowen analyst Andrew Charles believes that 12% growth is possible in 2027. He has a Buy rating and $515 price target on the stock, up more than 20% from Monday's close off $426.54.
It all makes Domino's valuation look quite reasonable. The stock trades at 24.2 times 12-month forward earnings, below its peak of 31.1 in March, and only about three points higher than Yum's 21.4 times. Domino's traded at a richer multiple versus Yum for most of the past decade because it has grown earnings at almost twice Yum's rate annually. The stock also trades below its average enterprise value/earnings before interest, taxes, depreciation, and amortization multiple, and only slightly above the S&P 500's valuation, when it has averaged a 50% premium to the index. "Valuation isn't demanding," writes RBC analyst Logan Reich, who has an Outperform rating and a $500 price target on the stock, up 17%.
Feeling hungry yet?
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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December 24, 2024 02:30 ET (07:30 GMT)
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