Can Domino's Keep Grabbing More of the Pie?

 | Oct 17, 2016 | 6:00 AM EDT
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Making money in pizza king Domino's (DPZ) this year has almost been as simple as ordering a large pie: just hit buy on the online trading platform and sit back and count the dough.

Shares of Domino's have skyrocketed to the tune of 36% in 2016, dusting the S&P 500's 4.3% gain. The stock is up a ridiculous 370% in the last five years. Domino's hasn't exactly reinvented the wheel here folks, it sells gooey pizza to families that love ordering via mobile devices. Or has it?

The company's stellar sales gains have been fueled by a digital ordering platform that by all indications is not being rivaled by Yum Brands' (YUM) Pizza Hut or Papa John's (PZZA) (although Papa John's does do digital pretty well). While Domino's is focusing on making its tech platform even better, company execs have resisted the urge to clutter up the menu with new items that would slow up the preparation and delivery process.

Michigan-based Domino's marketing has consistently emphasized value -- no fancy new ingredients like Pizza Hut rolled out last year and more recently Papa John's with its attention on improving ingredient quality. Domino's has stayed true to its winning formula, one that has already been going on for some time.

Domino's outperformed Pizza Hut last year as it promoted a new $5.99 value menu, $8.99 pan pizzas and the ease of use of its digital ordering system. The company saw its domestic same-store sales spike 12% in 2015 compared to a 1% rise for Pizza Hut. Papa John's weighed in with a 5.9% increase.

"At the end of the day it's a combination of a number of things -- I think we got our food right starting six years ago with our re-launch, our approach to advertising has worked incredibly well with the direct honest nature of it connecting with consumers, and our technology, I think, is the best in the business," Domino's Pizza President and CEO Patrick Doyle told me in a February interview about its big 2015.

Now Domino's is an interesting spot as it prepares to deliver its third-quarter results on Tuesday. Given its valuation, Domino's could put up another blowout quarter and the stock sells off on the day. With high-growth names such as Domino's, the market eventually reaches a point where it doesn't get satisfied with great. If the quarter is mixed like it was in the first quarter (which surprised Wall Street), Domino's will be front page news on Tuesday as the stock gets hit.

In the end, Domino's likely crushed it again (against tough comparisons) during the quarter and investors will be rewarded for looking beyond a single day of trading.

Keep these factors in mind:

Pizza Hut reported a weak third quarter. Execs conceded at the investor day I went to last week that the brand has work to do on technology and other fronts to regain momentum. Someone had to steal those sales from Pizza Hut. In all realty, Domino's got the largest share of the pie, followed by Papa John's.

The U.S. diner clearly had a nose for value during the third quarter. That led them to take advantage of deflationary food prices at supermarkets such as Walmart (WMT) and Action Alerts PLUS holding Costco (COST) . But it also likely led them to pizza places such as Domino's instead of burger places like McDonald's (MCD) . Sonic's (SONC) recent earnings warning likely signaled another challenging quarter for the burger players as a result of the consumer appetite for value.

Call me crazy, but the election cycle plays right into the hands of the pizza companies. From news organizations ordering pizza for late-night coverage to families sitting around the TV at home to watch the chaos, the good old shareable pizza likely is the choice of many.

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