Markets
EPS

This Stock Is Up Over 437%... But It's Run Isn't Over Yet

As the market has so rudely demonstrated recently, it can put the screws to investors at a moment's notice. But that hasn't stopped some big-name stocks from rocketing to new heights.

One of the latest examples occurred on October 14. That day, while stock market indices seesawed violently, shares of a well-known restaurant chain jumped more than 11%.

The move took the stock to $84.30 -- at that point an all-time high, though the price has since moved a bit higher.

The company pleased the Street yet again in Q3, reporting an 18.8% year-over-year gain in profits and earnings per share ( EPS ) of $0.63, besting analyst expectations of $0.61.

Revenues were up 10.5% year-over-year to about $447 million, surpassing consensus estimates for sales of $436 million. What's more, Q3 marked the fourth-straight quarter in which the company met or beat earnings projections.

Since the bottom line typically drives stock prices, shares of the company have been doing very well, climbing about 23% so far this year, compared with barely a 3% gain for the S&P 500.

And this has been the pattern for a while. Since 2010, Domino's Pizza, Inc. (NYSE: DPZ ) grew per-share profits 92%, from $1.45 to $2.79, and its stock is up more than 437% from about $16 to nearly $86 currently.

Going forward, the firm should continue benefitting from strong growth in same-store sales -- revenues from locations that have been open at least a year. Lately, these have been enviable, rising almost 8% domestically and about 7% internationally in the third quarter and nearly 8% domestically and 12% internationally in the second quarter, for example. This shows Domino's is growing not just by opening new restaurants but by successfully operating existing ones.

New restaurants are, of course, a key part of the firm's expansion plans, but with far more focus on overseas growth since the U.S. market for takeout pizza is much more saturated. Of the 631 locations established last year, 573 were on foreign soil while only 58 were in the United States. Of the 715 stores opened in the past four quarters, 638 were international and 77 were domestic.

There are currently almost 11,300 Domino's worldwide, and about 55% are international. Expansion plans call for roughly 1,000 new U.S. locations and several thousand more international locations over the long term.

Domino's could achieve these goals pretty quickly (in maybe five or six years) because of its franchise model, which facilitates growth by shifting startup costs to the franchisee, who then must pay ongoing royalties. Of Domino's $1.9 billion in total annual revenue, domestic and international royalties account for 12% and 14%, respectively. Company-owned restaurants (there are only around 400) generate 17% of sales.

International revenues should eventually dwarf domestic sales because the former have been growing much faster -- about 13% annually, versus only around 3%-a-year domestic growth. But by far the biggest money maker for Domino's right now is its supply chain business that sells ingredients and restaurant equipment to franchises.

While international supply chain revenue isn't broken out on the firm's financial statements, domestic is. And it's impressive, accounting for a whopping 57% of Domino's top line.

That's not likely to change much anytime soon.

Since franchises need ingredients and equipment to for daily operations, domestic supply chain should always be a reliable and generous revenue source. During the past four years for example, it has kept up a solid 7%-a-year growth rate, and I suspect the international supply chain has been seeing double-digit increases because overseas growth is currently much more robust.

To maximize the supply chain's appeal and, in turn, its revenue, Domino's shares some profits with franchises that use the chain for all of their ingredient and equipment needs. Spiking commodity prices can boost supply chain revenue, too, because Domino's passes along any price increases to franchise owners.

In 2013, for instance, rising cheese prices augmented domestic supply chain revenue by nearly $9 million, or about 13% of that year's $68 million revenue gain. Something similar is probably happening this year, too, since Domino's said its commodity prices rose 5% year-over-year in Q3 and will probably be up 4%-to-6% for all of 2014.

Importantly, to help address the domestic saturation issue, Domino's has been adding menu items to include things like pasta dishes, sandwiches and chicken wings. The firm has also been rebranding with so-called pizza theater stores, which include a much more upscale lobby and facilities, as well as a clear view of the kitchen and food preparation process. Roughly 200 have been opened nationwide in the past couple years.

Because of the factors I've described, Domino's is capable of achieving the 15%-a-year earnings growth analysts are forecasting for the next five years. Assuming an earnings multiple of 26, which is 15% lower than the current multiple of 31, this implies about 70% upside potential for Domino's by late 2019.

Risks to Consider: Shareholders should monitor Domino's debt, which has been elevated for years because of a recapitalization half a decade or so ago. The debt, about $1.5 billion mainly of the long-term variety, is manageable now because Domino's is very profitable. But making payments could become an issue if business took a substantial downturn for some reason .

Action to Take --> Even in tough markets there are still strong growth stories and Domino's is one of them. Investors seeking exposure to the often lucrative restaurant space should consider adding it to their portfolios.

Domino's strong momentum could make it a candidate for the Alpha Trader system. When a company has upward momentum greater than 70% of the broader market and strong free cash flow, it is signaled as a "buy" on the Alpha Trader system. This technique has been used to flag stocks that are about to see double, sometimes triple-digit upside in the weeks and months before it happens. For more information about the stocks currently flashing "buy," click here .

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

© Copyright 2001-2016 StreetAuthority, LLC. All Rights Reserved.


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

In This Story

EPS

Other Topics

Investing Stocks