Value Investor Revisit: Domino's Pizza Value Remains, But... (DPZ)

It was in early April that we called Domino’s Pizza, Inc. (NYSE: DPZ) a value stock as America’s pure-play pizza delivery giant.  After all, it was trading at only about 12-times forward earnings expectations.  The company is also still heavily burdened with debt.  This morning’s move higher is after a solid earnings report and we are revisiting our initial value call on Domino’s.

Domino’s earnings beat estimates by $0.08 on strong international sales.  The pizza chain said earnings were $0.42 EPS and revenue rose over 2% to $389.2 million versus Thomson Reuters consensus estimates of $0.34 EPS and $380.6 million in revenues.

Domestic same store sales were down 1.4% in quarter, which the company noted was a tough comparable sales period because the first quarter of 2010 saw a whopping 14.3% gain. Global same store sales rose by 8.2% for the first quarter, but that would have been a gain of 6.2% if you eliminate the benefits from currency fluctuations.  It seems that a new customer base was established and has resulted in strong two-year sales growth.

When our April 6 note went out we said, “Analysts have a mere $19.00 price target today, but that is likely to improve as the company grows cash and pays down more debt.”  That target had climbed to $19.56 before earnings and shares closed yesterday at $19.20.  This morning we saw shares hit a new 52-week high of $20.93 and shares are still up about 6.7% at $20.50.

The good news is that today’s earnings report is likely to drive up 2011 earnings estimates.  Thomson Reuters has estimates of $1.45 EPS for 2011 and $1.62 EPS for 2012.  If we blend these two and increase the estimates marginally to $1.60 EPS, then Domino’s is trading closer to 13-times forward earnings.

Domino’s spent about $5.8 million to repurchase and retire 357,605 shares of its common stock in the first quarter for an average price of $16.31 per share. It has used approximately 54% of the total $200 million authorized amount and can spend approximately $91.5 million remaining under its buyback plan.

The total cash and cash came to $92.6 million, with an additional $84.8 million in restricted cash for a total of $177.4 million in its liquidity.  Its debt was static at $1.45 billion.  While spending $5 million per quarter won’t take down much debt, we would rather see Domino’s use bring down its debt level rather than spending cash to buy back stock.  In theory that just makes this more leveraged on a per share basis.

Domino’s has now crossed the adjusted consensus analyst price targets. The good news is that this one can still appreciate some more.  The problem is that Domino’s stock was up more than 12% at the peak this morning from our first value call just a month ago.  Domino’s is not exactly a major growth story as it is one of the oldest pizza delivery chains out there.  That being said, we are still optimistic that Domino’s can continue to appreciate some in 2011 and into 2012, but this pop here has just taken out much of that upside in what may be “too much, too fast.”

As far as a fair value for 2012, we think that Domino’s can reach $25.00.  If we get too close to that upside target, we’ll have to revisit our “value” thesis.  After all, the company’s balance sheet is still rather leveraged.

JON C. OGG