Domino's Delivers Any Way You Slice It, but Don't Bite Right Now

 | Jun 13, 2017 | 12:00 PM EDT
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Jim Cramer created the acronym FANG to represent high-fliers Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Google, now Alphabet (GOOGL) . However, in the last five years, with the exception of Netflix, shares of Domino's Pizza (DPZ) have delivered a substantially larger return than any of those names.

Over the latest five-year period, Domino's is up 627% versus 349% for Facebook, 334% for Amazon and 236% for Google.

Source: Yahoo! Finance

At the end of April, Domino's reported first-quarter earnings of $1.26 per share, which was $0.09 better than the consensus estimate. Revenue rose 15.8% to $624.2 million. Domestic same-store sales grew an astounding 10.2%, representing the 24th consecutive quarter of positive sales. Its international division reported same-store sales growth of 4.3%, marking the 93rd consecutive quarter of higher international same-store sales.

Domino's added 189 stores, consisting of 28 net new domestic locations and 161 net new international stores. Over the four trailing quarters, Domino's added 1,308 net new stores. As of March 26, Domino's had 14,000 stores worldwide.

On the call after the earnings release, management said it strongly believes it can squeeze in another 1,000 stores in the U.S. The company ended the quarter with 5,400 locations in the United States. The U.S. pizza market is estimated at $37 billion and expected to grow in the low single digits annually. Over the next three to five years, management believes it can grow domestic same-store sales in the range of 3% to 6% annually and total global retail sales in the range of 8% to 12%

According to NPD Group/CREST research, small independent chains control 42% of the U.S. pizza-delivery business. Independents hold 57% of the quick service restaurant (QSR) pizza business, while Domino's has a 14% QSR market share and a 28% delivery share. So, Domino's management believes there is plenty of share left to take.

NPD/Crest also said it believes the international market for pizza is expected to grow at a consolidated annualized  rate of 3% to 4%, or from $85 billion to $103 billion by 2020.

Domino's is taking share because it reinvented its core product in 2010, improved food quality and used technology to drive sales.

For fiscal 2017, the Wall Street analyst consensus is that Domino's will earn $5.44 per share on $2.75 billion in revenue. Next year, analysts expect revenue to jump 9.8% to $3.02 billion and the company to earn $6.45 per share.

At the current quote, Domino's is trading at 38x this year's earnings estimate and 32x next year's estimate, which is a huge premium in the quick service restaurant (QSR) segment. Typically the QSR group trades at 16x to 20x estimates, which makes me want to wait for a correction in Domino's share price. While I still like the company, I would take an opportunistic approach to Domino's and build a position on weakness.

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