Domino's Pizza, Inc. (NYSE:DPZ)

CAPS Rating: 4 out of 5

Engaged in retail sales of food through Company-owned Domino's Pizza stores; sales of food, equipment & supplies to Company-owned & franchised Domino's Pizza stores; & receipt of royalties from domestic & international Domino's Pizza franchisees.

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Player Avatar jed71 (77.22) Submitted: 1/14/2010 3:38:07 PM : Underperform Start Price: $10.26 DPZ Score: -723.74

So one upgrade and the stock shoots up 11%? Laughable... their product may be improving, yes, but the finanicals, especially the balance sheet, have a long ways to go. Assets of 180MM and liabilities of $1.8BB is frankly pretty pitiful.

They have $1.6BB in long term debt. As interest rates begin to creep up, the bond market will begin demanding higher yields, and banks will continue to tighten commercial lending standards. It will become increasingly difficult for a company, such as DPZ, to borrow money. The debt they have will add a large amount of pressure to their income statement and make it more difficult for the firm to realize shareholder's net income expectations. They also have massive negative equity (about $1.4BB) that will take them years to work off. In my opinion, they are worth absolutely nothing to the shareholders today (and the balance sheet supports that assessment).

In addition, it seems every restaurant in the country is competing for a piece of the shrinking U.S. "casual dining" market. This increased competition is going to pressure all participants margins over the near term. Stay away at all costs.

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Member Avatar ikkyu2 (99.22) Submitted: 8/11/2010 5:51:27 PM
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"As interest rates begin to creep up, the bond market will begin demanding higher yields, and banks will continue to tighten commercial lending standards. It will become increasingly difficult for a company, such as DPZ, to borrow money."

This is actually an argument that DPZ was wise to leverage itself to the max in the lowest-rate credit environment in history. It's the companies that are holding off taking on debt, in order to do so in 2013 and 2014, that are making a long-term error with regard to taking on debt. As you say, there's no chance of DPZ being allowed to take on much more debt ;)

Before you talk about what debt can and cannot do to an income statement, you should review the income statements. Dominos sports incredible gross margins - something like 40% - and the power of their income statement brushes aside the paltry interest amounts like a little flea. They throw off free cash flow like a dog shaking off water from a summer lawn sprinkler party.

Competition exists in most sectors. Dominos competes pretty well in my opinion.

Member Avatar jed71 (77.22) Submitted: 8/12/2010 6:03:49 PM
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I can't believe someone is actually defending this pile o' junk, but I'll spend a few moments responding. I respect your argument and you make some fair points. But the $1.5BB in negative equity is DPZ's achille's heel. Since you want to talk free cash flow, I'll throw this one back at you. Let's say DPZ was growing at 20% for the next ten years, which is an incredibly rosy scenario. What would be your fair value estimate of the stock using discounted cash flows? The latest estimate in earnings I have for 2010 is $1.28, but let's just round it to $1.30 to make it easy. If I use a discount rate of 12% and a terminal rate of 4%, both pretty standard, I come up with a valuation of about $6.60, about half of where it trades now, give or take a few pennies. So even in the rosiest of future scenarios, their NEGATIVE $22 per share in book value acts as one massive dead weight. I think I have pretty good odds of closing this positive, but time will tell.

Also, I calculate the gross margin at 27%, not 40%. But maybe my figures are old. I also hold no position, either short and DEFINITELY not long. Best of luck.

Member Avatar ikkyu2 (99.22) Submitted: 2/28/2012 3:27:38 PM
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I don't hold Domino's either, and you won't be surprised at the reason: their debt-to-equity ratio exceeds my comfort zone. But by any metric, failing to buy shares at $9 where I made my first pick would have to be classed as 'a mistake'.

Member Avatar jed71 (77.22) Submitted: 2/29/2012 9:17:54 AM
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Good call on your part (I mean the green thumb in Caps), and too bad you didn't buy in RL.

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