Morningstar | Initiating Coverage of Domino’s Pizza With a $275 FVE and Wide Moat; Shares Fairly Valued
We are initiating coverage on Domino’s Pizza at a $275 per share valuation, assigning the quick-service pizza chain a wide moat rating. Our valuation assumes 7% average annual top-line growth, restaurant margins expanding to mid-to-high 20s (from 23% in 2018) and adjusted operating margins expanding to approximately 20.5% by 2028 (from 16.7% in 2019). Our long-term sales growth forecast assumes low- to mid-single-digit comp growth (owing to annual inflationary price increases, carryout expansion efforts, and continued loyalty program marketing) and mid-single-digit unit growth as the firm continues to build store density and improve delivery speeds. While we have a positive view of Domino’s competitive positioning, we currently view shares as fairly valued and suggest investors await a larger margin of safety.Our moat rating is based on Domino’s intangible assets in the form of a well-known brand name, technology developments ahead of peers, a franchise system aligned with driving unit-level productivity, and cost advantages stemming from buying scale and delivery route density. Domino’s intangible assets are supported by a leading market share and a globally cohesive franchisee system. Franchisee financial health remains exceptionally strong; franchisees have strong cash-on-cash returns of just above 40% that rank among the highest in the U.S. quick-service restaurant industry.
Combined with the ability to source inputs at a competitive price and store/delivery route density, we believe Domino’s developed a cost advantage. Domino’s has been increasing store density by splitting and subdividing franchise store territories which we believe generates a virtuous cycle where proximity leads to better service, translating to more orders, which incentivizes delivery drivers to work for Domino’s as they will get more deliveries (and tips). Additionally, this allows Domino’s to deliver for cheaper making it extremely difficult for smaller chains to compete on price.
Domino's Pizza is a pizza company. The company is primarily engaged in the following business activities: retail sales of food through the company-owned Domino's Pizza stores; sales of food, equipment and supplies to the company-owned and franchised Domino's Pizza stores through the company-owned supply chain centers; receipt of royalties, advertising contributions and fees from United States Domino's Pizza franchisees; and receipt of royalties and fees from international Domino's Pizza franchisees. The company's menu features pizza products with varying sizes and crust types. The company's store also provides oven-baked sandwiches, pasta, boneless chicken and wings, bread side items, desserts and soft drink products.
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