Should Investors Grab a Slice of Domino's Pizza Stock?

Few non-technology stocks have performed as well Domino's Pizza (NYSE:DPZ) this year. Shares of the pizza delivery company have climbed 47% year-to-date making it the 25^th best performer in the S&P 500.

Domino's has been a clear beneficiary of the pandemic as people have been quick to dial their local pizza chain amid restaurant closures and restrictions. Can Domino's stay hot?

As virus cases turn higher in many parts of the country and consumers hunker down for the winter, there's no reason to believe that Domino's won't continue to see a hearty appetite for delivery and pickup orders.

What is Domino's Pizza's Business Model?

Domino's business model is straightforward. It operates the world's leading quick-service restaurant (QSR) pizza franchise with a 17% global market share in a highly fragmented space. There is roughly a 50-50 split between U.S. and international sales.

Almost all of Domino's 17,000 plus stores across 90 markets are franchised. The franchise model serves the company well because it keeps costs low and allows it to seamlessly collect licensing and other revenue from its huge franchise base.

Franchisees get their slice of the pie too. They benefit from the strong brand name and ongoing corporate support. On average, each U.S. franchisee generates annual EBITDA of over $1 million—and the average franchisee operates seven Domino's locations.

The Domino's model works because it caters to the delivery and carryout crowd, the two biggest segments of the QSR pizza industry. Even prior to the pandemic, dining in for pizza wasn't popular—and it will likely become increasingly less popular in the future.

Domino's is also thriving in this environment because of the success of its digital platform. Last quarter more than 70% of U.S. sales came through its online and mobile channels.

How Will Domino's Pizza Generate Growth the Next 10 Years?

Domino's global growth recipe is far from a one-hit pandemic wonder. From 2010 to 2019, U.S. and International same-store sales growth averaged 6.9% and 5.5%, respectively. By 2019, Domino's earnings had more than tripled from five years prior.

It is remarkable that the stock began last decade trading at $7.76 per share. Domino's stock closed out the 2010-2019 decade with a total return of nearly 4,000% compared to 256% for the S&P 500. An ordinary business model with extraordinary success.

The international segment has had an especially impressive run. Last quarter marked the 106^thstraight period of positive same-store sales growth. And while Domino's will look to expand its U.S. footprint, it’s the faster-growing international segment that will be relied upon for the heavy lifting this decade.

Domino's stock probably won't go on another 4,000% run this decade, but investors can expect reliable growth to continue. The company plans to continue its overseas growth record by adding thousands of locations across its top developed and emerging markets. Australia, Japan, France, Germany, Mexico, and China are all projected to top the 1,000-store mark in the coming years.

Is Domino's Pizza Stock a Buy Ahead of Q3 Earnings?

It wouldn't be surprising to see Domino's gap higher later this week. Why? The company is scheduled to report third quarter earnings before the market opens on October 8^th —and all signs point to another tasty quarter.

After crushing the second-quarter consensus earnings per share estimate by 33%, Domino's is likely cooking up another earnings beat for Q3. This time analysts are expecting EPS of $2.72 which would represent 33% profit growth over last year.

Given how slow the restaurant industry has been to reopen and recover, the QSR group likely continued to grab consumer demand during the summer months. A bottom-line number on par with last quarter's $2.99 is quite feasible.

Despite the big run in Domino's share price this year, analysts see more room to run. Not one of the 30 analysts covering Domino's has a sell rating. In fact, most have maintained their buy ratings. Last week, analysts from Morgan Stanley and RBC Capital reiterated their buy ratings on Domino's with price targets of $449 and $458, respectively.

Sure, that's not a ton of upside from current levels, but from a risk-reward perspective Domino's stock sure looks appetizing. It's a relatively safe bet that in this economic environment Domino's will continue to deliver strong financial performance.

The near-term technical picture looks positive as well. Back on September 17^th with the stock trading just below the $400-mark, Domino's chart formed a symmetrical continuation triangle. The bullish pattern suggested the stock could ascend to the $437 to $446 range. It reached a peak of $435.58 just 12 days later. Domino's has pulled back a bit since but appears to have plenty of momentum to fulfill the technical pattern.

The Domino's bear would be quick to point to the stock's 33.5x forward earnings multiple—arguably lofty for a simple pizza chain. But given the recent growth turned in by the company and the likelihood for pandemic-related demand to persist well into 2021, the price tag seems warranted. Investors looking for a less volatile (perhaps non-technology) stock that can continue to produce above-normal growth should grab a slice of Domino's Pizza.