Domino's Pizza Inc (DPZ, Financial) has been performing well in the stock market, with a daily gain of 1.6% and a 3-month gain of 29.31%. Despite this, the question arises: is the stock modestly undervalued? With an Earnings Per Share (EPS) of 13.23, this article aims to answer this question through a detailed valuation analysis. Keep reading to gain a deeper understanding of the stock's intrinsic value.
Company Overview
Domino's Pizza Inc (DPZ, Financial) is a leading restaurant operator and franchiser, boasting nearly 20,000 stores globally across more than 90 international markets as of the end of 2022. The company generates revenue through the sale of pizza, wings, salads, sandwiches, and desserts at its company-owned stores, royalty and marketing contributions from franchise-operated stores, and its network of supply chain facilities. With approximately $17.7 billion in 2022 system sales, Domino's Pizza stands as the largest player in the global pizza market.
Despite a current stock price of $392.33, the GF Value estimates the fair value of the stock to be $447.36. This discrepancy suggests that the stock may be modestly undervalued, paving the way for a more profound exploration of the company's value.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It's calculated based on historical multiples that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line provides an overview of the fair value that the stock should be traded at.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. Based on this method, Domino's Pizza (DPZ, Financial) is estimated to be modestly undervalued. With a market cap of $13.80 billion, the stock's long-term return is likely to be higher than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Looking at the cash-to-debt ratio and interest coverage can provide a good initial perspective on the company's financial strength. Domino's Pizza has a cash-to-debt ratio of 0.02, which ranks worse than 95.13% of 349 companies in the Restaurants industry. Based on this, GuruFocus ranks Domino's Pizza's financial strength as 4 out of 10, suggesting poor balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Domino's Pizza has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $4.50 billion and Earnings Per Share (EPS) of $13.23. Its operating margin of 17.7% is better than 92.84% of 349 companies in the Restaurants industry. Overall, GuruFocus ranks Domino's Pizza's profitability as strong.
Growth is probably the most important factor in the valuation of a company. 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 is13.3%, which ranks better than 87.31% of 331 companies in the Restaurants industry. The 3-year average EBITDA growth rate is 12.6%, which ranks better than 66.31% of 279 companies in the Restaurants industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Domino's Pizza's ROIC was 50.52, while its WACC came in at 8.87.
Conclusion
Overall, Domino's Pizza (DPZ, Financial) stock is estimated to be modestly undervalued. The company's financial condition is poor, but its profitability is strong. Its growth ranks better than 66.31% of 279 companies in the Restaurants industry. To learn more about Domino's Pizza stock, you can check out its 30-Year Financials here.
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