Domino’s Pizza Price Target Raised to $422 by Morgan Stanley; Carryout Market Represents Incremental Growth

Domino’s Pizza, reported a better-than-expected second-quarter earnings result, which increased confidence in sustaining strong domestic comp momentum in the near term, including new bone-in wings products and solid new customer acquisitions, wrote Morgan Stanley’s equity analyst John Glass, who raised Domino’s Pizza’s price target to $422.

According to Morgan Stanley, there were several points of encouragement that led them to raise sales and earnings numbers post second quarter.

Those include: 1) Continued strong comp momentum that accelerated in May and showed no discernible signs of dropping off in June. COVID-19-related factors are playing an important role, but so is new customer acquisition and an uptick in digital + loyalty usage. 2) Bone-in wings as a new product for Domino’s Pizza, the largest pizza company in the world, has the potential to see strong consumer reaction to this popular menu item. 3) More new products to come. 4) G&A savings are likely outpacing Street expectations, now with two quarters<$90M. DPZ has quietly reset G&A spending over the past year, the benefits of which are now becoming more visible, Morgan Stanley noted.

The largest pizza company in the world, based on global retail sales said its worldwide sales increased 5.7% in the second quarter, or 8.1% excluding foreign currency impact. Global retail sales in the second quarter were positively impacted by U.S. same-store sales but were negatively impacted by temporary store closures in certain international markets due to the COVID-19 pandemic. U.S. sales grew 16.1% during the quarter.

The largest pizza chain in the world said its revenues increased $108.4 million, or 13.4%, in the second quarter of 2020; Net Income increased $26.3 million, or 28.5% and diluted EPS for the second quarter was $2.99, up 36.5% over the prior-year quarter.

“Clearly FY20 will be well below 19, but with market share opportunity still ahead for franchisees, and unit economics healthy, we think it’s more a question of timing, rather than if, that robust unit growth returns. Here we raise our estimates and PT for 20/21 and reiterate our OW. DPZ is clearly a beneficiary of the current environment but perhaps it will get increasing credit as a post-COVID-19 beneficiary as well,” said Morgan Stanley’s Glass.

“We are increasing 2H20 US comps such that FY20 is now 9.1% vs 7.4% prior and FY21 2.0% vs 0.3% prior; international is little changed and remains LSD in both years. FY20 all-in op margin moves to 18.0% from 17.3% and EPS to $12.35 from $11.38 prior, while FY21 increases to $12.44 from $11.83 previously. Based on these increased earnings estimates, our price target increases to $422 from $405.”

Morgan Stanley with a base case forecast of $422, predicts $493 under a bull-case scenario and $284 under the worst-case scenario. Twenty-three analysts forecast the average price in 12 months at $412.67 with a high forecast of $450.00 and a low forecast of $330.00. The average price target represents a 1.26% increase from the last price of $407.52. From those 23, 15 analysts rated ‘Buy’, eight rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

We second Morgan Stanley on Domino’s Pizza stock outlook. We also think it is good to buy at the current level and target at least $420 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

“Delivery momentum supporting best in class system sales and unit growth in a still fragmented category; advantaged category in 2020 with COVID-19 disruption. Well-positioned in key US market: Technology leadership, data-driven investment and marketing decisions are hallmarks of the brand. Carryout market represents incremental growth,” Morgan Stanley’s Glass said.

“Sustainable competitive advantages vs aggregators on value, delivery speed which could become more visible in ’20 and ’21. Strong cash flow generation, stable franchise income stream and international business are partially offset by a price competitive category & high leverage.”