What happens when great companies have stocks that are not so great? That’s the question shareholders of Domino’s Pizza, Inc. (NYSE: DPZ) should be asking themselves. Domino’s is still growing its footprint, it is still offering consumers value for lunch or dinner, and its stock was being slammed after earnings. Domino’s may now be an exception to many other stocks that have bad earnings reactions. The news may have just set up the beginning of a great opportunity for investors who felt they missed the boat. But…
Domino’s stock was the worst performing of all S&P 500 stocks on Thursday, July 18. The mid-afternoon trading was down 13% at $410.50 and the 2.1 million shares that had traded hands by 12:30 pm Eastern Time was already nearing a 4x volume-spike. Its 52-week range is $330.05 to $542.75.
TIME TO DECIDE
As Oggonomics is always hunting for new opportunities, now is the time to decide how new investors who felt they missed the Domino’s boat should view the stock. A full-blown Strategic Bull would just buy the stock thinking it’s sell-off was too aggressive. A “chicken bull” would nibble into a position now and then build that position up over a period of months. Hopefully the “nelllie bull” and “no bull” scenarios do not need explaining.
Please keep in mind that this new more modest stock price set-up after this drop being called “the beginning of a great opportunity for investors” is in no way intended to be a recommendation to buy shares of Domino’s Pizza. The move is an interesting setup, but the severity of the drop adds in a different historical dilemma.
TRADING HISTORY DAMAGED
One thing that investors should not ignore is that this post-earnings reaction took Domino’s stock handily under its 200-day moving average. That means that many newer shareholders who entered in recent months and many long-term holders are now very disappointed. This is also the largest one-day drop since early in 2023. If the stock does not recover a few dollars higher, then some investors will point out that it broke what had been strong support back in February. And if this doesn’t hold, there really doesn’t look like much additional support until $400 or under.
THE ONE DEFENDER OF DOMINO’S
One analyst report was issued on July 18 that is still immediately after the post-earnings reaction. Wedbush Securities maintained its Outperform rating and its $575 price target. Oggonomics would expect many analysts to either issue downgrades or issue fairly harsh cuts to their price targets in the hours and days ahead.
GET READY FOR ANALYST CUTS
Oggonomics always tracks analyst upgrades shortly ahead of earnings because this means an analyst is sticking their neck out and risking their reputation. On July 8, Robert W. Baird raised its rating to Outperform from Neutral and raised its price target to $580 from $530 (versus a prior $493.73 close). And a month earlier, on June 13, Goldman Sachs started Domino’s with a new Buy rating and it issued a $612 price target (versus a prior $529.88 close).
WHAT’S BAD RIGHT NOW
The goal here is not to just repeat the earnings reports. Beating on earnings is good, but missing on revenues and slowing down on growing its number of stores are trends that are not helping at all. Double-digit percentage drops after earnings is never a good thing. But the note that Domino’s will fall short of its 2024 goal for 925 net international by 175 to 275 new locations is the main issue.
VALUATIONS
Without changing longer-term projections, Domino’s is now valued at about 22-timex next year’s earnings. That certainly isn’t cheap, but it had been valued at closer to 27-times forward earnings much of this year. This appears to be an earnings revaluation that is taking place. Let’s just say that earnings revaluations and severe technical damage (200-day MA violation) can take a while to repair shareholder damage.
Investors cannot apply simple revenue metrics from chain to chain for competitors. Domino’s has a mix of franchise and company-owned stores, although independent franchise owners were shown to account for 99% of Domino’s stores. Domino’s also generated over 85% of its U.S. retail sales in 2023 from its digital channels. And perhaps the most critical difference between Domino’s and many of the other public restaurant stocks is that its delivery and take-out models means Domino’s doesn’t have to staff its stores with people in a sit-down setting.
IS DOMINO’S LARGE ENOUGH?
Investors should keep in mind that Domino’s remains a key public restaurant stock. The company has a $14.2 billion market cap after this big drop and it counts over 20,900 stores in its enterprise spread over 90 markets. At the end of 2023, it counted 6,566 U.S. franchise stores and 13,737 international stores. Domino’s annual sales rate as of this last quarter was over $18.7 billion.
Domino’s did say that, while it has share repurchases of $1.12 billion still available for authorization, it only spent $25 million in the last quarter. Perhaps this dip in the stock will entice it to come back into buying its own stock.
WHAT’s REALLY HAPPENING
One key issue that Domino’s has tried to manage is its value proposition. Its same store sales growth (4.8% U.S. and 2.1% international) and showing positive order counts in the delivery and carryout business means that customers, who are still reeling from inflationary price hikes in everything else, are still choosing Domino’s. Not every restaurant chain can say that.
Domino’s is still targeting 7%+ annual global retail sales growth and 8%+ annual income from operations growth. It also still expects 175 or more net store openings annually for 2024 to 2028, although it temporarily suspended its guidance metric of 1,100+ global net stores until the full effect of Domino’s Pizza Enterprises’ store opens and closures on international net store growth are known.
Strategic BULL OR CHICKEN BULL?
A strategic bull might look at the reaction in Domino’s as an immediate buying opportunity. A chicken bull would either wait for a little more pullback or they would only initiate a small position and build that position up over time. Despite having the name “Strategic Bull” this is one that looks and feels more like a “chicken bull” strategy is more sensible as of today. Then again, buyers can always own put options to hedge for downside risk.
The 2-year chart below is provided by StockCharts.com.
