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Is Domino's Pizza Stock a Buy?

Domino's Pizza (NYSE: DPZ) is one of the few restaurant companies to see a rise in business due to COVID-19. Thanks to the pandemic, it temporarily found itself with less competition as sit-down restaurants closed their doors.

However, the company had maintained a brisk growth rate before COVID-19 too. That helped take the stock steadily higher over the last few years. Now, investors need to determine where the company stands once society moves past the contagion.

The state of pizza delivery

Domino's operates what some consider "ghost kitchens" -- kitchens detached from dining rooms. The pandemic helped the pizza giant as consumers turned to Domino's as a familiar option for takeout and delivery, which were already the primary dining options the chain offers.

Today, most of the country has emerged from the lockdowns with consumers beginning to eat out, but Domino's stock has remained steady amid this recovery. 

Man in red shirt and red hat delivering two pizzas to a young woman at her door.

Image source: Getty Images.

Domino's had built a years-long track record for shareholders. At the end of 2019, it had grown to almost 5,800 franchises in the U.S. alone, in addition to 342 company-owned stores. Moreover, it operates just under 11,000 franchises in more than 90 international markets.

Furthermore, though the pandemic forced some temporary closures in places like sports venues or areas with the strictest lockdowns, expansion has continued. The company added a net 84 stores across the world in the second quarter and 69 in the first quarter.

Domino's financials

This growth has helped take the stock's forward price-to-earnings (P/E) multiple to about 31. Despite its 35% year-to-date gains, Domino's stock still trades close to its average five-year forward multiple.

Recent results help justify this valuation. In the most recent quarter, diluted earnings increased 36.5% year over year. Global retail sales were up 8.1%, and the U.S. experienced same-store sales growth of more than 16%.

Thanks to COVID-19, the company may have already logged most of its near-term growth. For fiscal 2021, analysts forecast earnings will increase only 1.9%, but the company delivered double-digit growth in each of the previous five years (including what is expected for the current fiscal year).

Domino's has also built a brief track record of dividend hikes. It has raised its dividend every year since 2014, but the current payout amounts to a yield of about 0.8%, well below the average for the S&P 500 at 1.8%.

Can the stock extend its multi-year run?

Long-term Domino's investors should probably continue to stay the course. The stock has risen by more than 2,900% over the last 10 years.

DPZ Chart

Data by YCharts.

The next 10 years are unlikely to duplicate such a return.

However, investors should take comfort in the company's pre-pandemic trajectory. Domino's has proven it can increase revenue and profits amid stiff competition, and solid growth during some of the most challenging months ever for the restaurant industry is a good sign the company can sustain its expansion when the world moves past COVID-19.

For anyone looking to invest in the broad recovery of the restaurant industry, this consumer discretionary stock is a standout pick that is shielded from the worst effects of the pandemic.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Domino's Pizza. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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