The stock of Domino's Pizza (NYSE:DPZ, 30-year Financials) is estimated 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 $430.03 per share and the market cap of $16.7 billion, Domino's Pizza stock is estimated to be 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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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Domino's Pizza has a cash-to-debt ratio of 0.06, which ranks worse than 88% of the companies in Restaurants industry. Based on this, GuruFocus ranks Domino's Pizza's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Domino's Pizza over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower 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 94% of the companies in Restaurants industry. Overall, the profitability of Domino's Pizza is ranked 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Domino's Pizza is 21.1%, which ranks better than 94% of the companies in Restaurants industry. The 3-year average EBITDA growth rate is 18.9%, which ranks better than 76% of the companies in Restaurants industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Domino's Pizza's return on invested capital is 58.28, and its cost of capital is 4.36. The historical ROIC vs WACC comparison of Domino's Pizza is shown below:
In closing, Domino's Pizza (NYSE:DPZ, 30-year Financials) stock appears to be fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 76% 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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