Re-evaluating DPZ

DPZ (Domino’s pizza) has been part of my stock portfolio, and recently reached the target price I had for it ($281 per share). I sold some while wondering if it deserved a new target price.

One mistake I made in evaluating it the first time was to price it on a quarterly EPS basis, instead of trailing 12-months EPS. It is clear to me that DPZ is seasonal and should be evaluated on a 12 months basis. Here are the historic EPS for the last 13 years (source: macrotrends.net):

EPS for DPZ since 2006

For instance, Q4 beat Q1-2-3 every year without exception.

Another notable trend is how consistent the trailing 12-month EPS has been in the last 10 years. It went down only a couple of times, and by small amounts.

Perhaps more interesting, sales have been increasing since 2012, and Q1 2019 showed some weakness in year on year growth:

Sales for DPZ since 2006

One explanation might be that it was simply too hard to maintain the rate of growth from last year (20+%), and so the growth for 2019 might not be as impressive. Likely, the growth in sales this year will be around 6 to 8%.

All in all, I think 12-months trailing sales give a little more data that EPS for that stock, so I am ready to give a 60% weight to sales in my calculation.

According to Yahoo finance, DPZ Enterprise value is $15.19B, trailing 12 months revenue are $3.483B, trailing income is $366M. A fair price would be 5.5 times sales given the solid growth in the last few years, and 44 times income, hoping aggressive growth with come back in the next 2–3 years, in particular in the international market.

EV = 0.6 * 5.5 * Revenue + 0.4 * 44 * Income
EV = 11.4 + 6.4(B)
EV = 17.8
MarketCap = EV - debt
          = 17.8 - 3.6 (B)
          = 14.2 (B)
ShareVal = MarketCap / # shares outstanding
ShareVal = 14.2 * 1000 / 41.1
         = $345

This is a 22% increase from the current price of $281 per share, which is a reasonable gain to expect in addition to the dividends provided by the stock.

May 2020 update

This article was written a year ago now and deserves a little of an update. The price of DPZ has now reached $376 per share.

Here is the new revenue chart:

And the income chart:

Applying the formula I had last year for DPZ:

EV = 0.6 * 5.5 * Revenue + 0.4 * 44 * Income
   = 12.06 + 7.55 (B)
   = 19.6B
MarketCap = EV - debt
          = 19.6 - 4.2 (B)
          = 15.4 (B)
ShareVal = MarketCap (in $million)/ #shares outstanding (in million)
ShareVal = 15.4 * 1000 / 39.1
         = $394

$394 corresponds to a mild 5% increase from the current level of DPZ at 376. So I believe my valuation still holds and I can keep my shares for that price.