Why a $5.99 pizza could be a $599 / share stock, and it’s a fantastic deal for Wall Street

Reporting earnings on Thursday (7/19/18), Domino’s Pizza ($DPZ) could be headed back towards its 52-week high. This could be for a few reasons, but one of the key reasons it seems to have a CEO that can keep it together during earnings calls (ahem, looking at you $PZZA).

Why this is the slice of the pie you want

Regardless of the pizza with and without pineapple debate, $DPZ has proved impressive growth, with a 47% appreciation this year, and a 52-week trading range of $166.74-$293.81. (As of close of market 7/16/18 the stock was trading at $279.19)

But guess what, DPZ is outpacing competitors by leaps and bounds. We want to take a look at a few things.

  • What is their growth Q/Q? Competing brands are losing or breaking even (is 1% growth even worth it?) but DPZ is continuously stealing market share and growing by 4-8% Q/Q. We want to see if they keep this momentum.
  • Watching overseas growth? DPZ has significant opportunity worldwide, and watching the growth internationally could play out very well when it comes to investor confidence.
  • How they are using the company credit card? DPZ is using significant debt as leverage to continue to throw the competition in the oven, and its working. Keep on eye on how they are leveraging that debt, as well as paying it off.

Stop eating pizza and instead buy pizza stock

Okay, don’t stop eating pizza. In fact, Credit Donkey says the average American eats 46 slices per year (https://www.creditdonkey.com/pizza-statistics.html). This bodes well when we analyze DPZ stock, and growth. Analyzing the numbers against past growth, we can look for a nearly 40% upside on this already pricey stock.

Using a 5 year discounted free cash flow model, we can look at DPZ stats from their recent SEC filings. Using a discount rate of 7%, perpetuity growth rate of 4%, we can calculate that revenue by CAGR (compound annual growth rate) of 12.1%, a 19.7% EBITDA margin, and 15.5% unlevered free cash flow by CAGR. This gives us a range of fair value of $301.85 to $653.92, but we can settle on a $419.23 share price by the time 2020 rolls around. This isn’t EXACTLY the $599 share price from the title, but by reducing debt, or accelerating growth through same store sales and international expansion, this pizza chain could balloon into the pepperoni behemoth that Wall Street will eat up, and a $599 share price is still within the realm of possibility.

But I still want to afford pizza

Want to invest in pizza but still eat it too? Since this is a bullish play, buying $420 calls for 18 JAN 2020, you would risk $5.70 a share, or $570 per contract to buy. If DPZ hits $420 by 17 JAN 2020, you stand to make a whopping 637% return on your money. In real dollar terms, you would bring in $4,200, and after entry price of $570 (plus whatever broker commissions you pay), you would walk away with ~$3,630. Just a note, this is a long call strategy. If the stock hits $420 before that time, you have the potential to make 1,000%+ return on your money.

 

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