The stock of Domino's Pizza (NYSE:DPZ, 30-year Financials) appears to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $437.92 per share and the market cap of $17 billion, Domino's Pizza stock shows every sign of being fairly valued. GF Value for Domino's Pizza is shown in the chart below.
Because Domino's Pizza is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 21.1% over the past three years and is estimated to grow 5.72% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Domino's Pizza has a cash-to-debt ratio of 0.06, which is worse than 85% of the companies in Restaurants industry. The overall financial strength of Domino's Pizza is 3 out of 10, which indicates that the financial strength of Domino's Pizza is poor. This is the debt and cash of Domino's Pizza over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Domino's Pizza has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.2 billion and earnings of $12.33 a share. Its operating margin is 17.89%, which ranks better than 93% of the companies in Restaurants industry. Overall, GuruFocus ranks the profitability of Domino's Pizza at 9 out of 10, which indicates strong profitability. This is the revenue and net income of Domino's Pizza over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Domino's Pizza is 21.1%, which ranks better than 95% of the companies in Restaurants industry. The 3-year average EBITDA growth rate is 18.9%, which ranks better than 78% of the companies in Restaurants industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Domino's Pizza's return on invested capital is 58.28, and its cost of capital is 4.27. The historical ROIC vs WACC comparison of Domino's Pizza is shown below:
Overall, The stock of Domino's Pizza (NYSE:DPZ, 30-year Financials) is estimated to be fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 78% of the companies in Restaurants industry. To learn more about Domino's Pizza stock, you can check out its 30-year Financials here.
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