Summary
John Schwinghamer discusses the rationale for strengthening the position in Domino's Pizza, emphasizing the stock's attractive valuation and the expectation of resumed earnings growth.
Audio Here’s a synthesized audio playback of the Purple Chips call between John and his associate Raymond. You can adjust the playback speed.
Transcript
Raymond: John, I see that you strengthened our position in Domino’s Pizza Friday. Could you elaborate on that?
John Schwinghamer: Certainly, Raymond. I've been looking ahead and considering our next move with Domino's Pizza. The thought process I’ll describe illustrates how we decide when to buy or add to a stock. We were happy to acquire additional DPZ stock Friday at $309.50.
Our portfolio had a 2.63% weighting in Domino's Pizza, and we wanted to raise that to 3.75% for an oversized position. Some may question why we wanted to buy this stock as it's been near its 52-week lows, but that's precisely the reason. The stock is attractively valued, and earnings are predicted to increase, offering an opportunity.
Investors often focus on the short term, overlooking potential long-term rewards. We, however, are looking a few years ahead. A glance at Domino's history shows a consistent earnings growth, except for a slight stagnation over the last five quarters.
Looking ahead, we expect this earnings growth to resume soon. According to the Thomson One system, the analyst forecasts for earnings indicate a positive trend. For instance, the earnings for the last reported quarter were $2.93 compared to $2.50 the previous year. The estimates for the upcoming quarters also show a similar trend, with the average annual earnings estimated at $13.37 compared to $12.07 last year.
These numbers are encouraging because $13.37 is close to their earnings peak from about a year and a quarter ago when the stock was over $500. Now, with the stock at around $310, it appears significantly undervalued. This is the lowest valuation we've seen for this stock in the last decade, and I believe this presents a great opportunity.
If the earnings resume their uptrend, we anticipate the stock trading close to $400 or even $420. This suggests a decent return, moving from $309.50 to over $400, and I believe this could happen within the next 18 months. This is why we've taken action by adding to our Domino's Pizza position.
Raymond: Are there any potential obstacles today that could hinder our strategy?
John Schwinghamer: The reliability of analyst forecasts is always a concern. However, I believe there is a sufficient margin to account for any substantial decline in the forecast. I trust Domino's Pizza to resume its upward trend.
Additionally, there's the possibility of a recession. Some companies are already reporting lower than expected numbers, hinting at a potential recession. Rising interest rates may exacerbate this situation. However, Domino's Pizza might fare better in such a scenario as people tend to favor cheap fast food like pizza during difficult times.
Raymond: Thank you, John, for this analysis.
John Schwinghamer: And thank you Raymond. I’ll provide you with Thomson One charts for our blogcast and please be sure to include the AI-assisted background research.
Raymond: Will do!
Charts
AI Assisted Research
Domino's Pizza (DPZ) has had flat TTM EPS for the last few quarters due to a number of factors, including:
• Rising costs: Domino's Pizza has been facing rising costs, such as the cost of labor and the cost of ingredients. These costs have impacted the company's margins and have led to flat EPS growth.
• Supply chain disruptions: Domino's Pizza has also been facing supply chain disruptions, such as delays in the delivery of ingredients. These disruptions have also impacted the company's margins and have led to flat EPS growth.
• Investments in growth initiatives: Domino's Pizza has been investing in a number of growth initiatives, such as its digital transformation efforts and its expansion into new markets. These investments have been successful in driving growth, but they have also weighed on EPS in the near term.
Despite these challenges, analysts are now predicting that EPS for DPZ will rise in the coming quarters. This is due to a number of factors, including:
• The company's strong brand and competitive position: Domino's Pizza is one of the most well-known and respected brands in the world. The company has a strong track record of innovation and customer satisfaction. This gives it a significant competitive advantage over its rivals.
• The continued growth of the pizza delivery market: The pizza delivery market is growing rapidly. This is due to a number of factors, such as the increasing popularity of online ordering and the growing number of dual-income households. Domino's Pizza is well-positioned to benefit from this growth, as it is the leading player in the pizza delivery market.
• The success of its digital transformation initiatives: Domino's Pizza has been investing heavily in its digital transformation initiatives. These initiatives have been successful in driving growth and improving customer satisfaction. For example, the company's Domino's app is one of the most popular food delivery apps in the world.
• The company's focus on cost-saving measures: Domino's Pizza has been focused on reducing costs in recent years. This has helped the company to improve its margins and profitability. For example, the company has been investing in new technology to improve its efficiency.
• The growth of its international business: Domino's Pizza has been growing its international business rapidly in recent years. Domino's had global retail sales of over $17.5 billion in 2022, with over $8.7 billion in the U.S. and nearly $8.8 billion internationally. As of Jan 1, 2023 DPZ had 6,686 US stores and 13,194 International stores.