Given what you’ve learned from the previous parts of this series, as an investor, you’d now like to know if Domino’s (DPZ) is undervalued, overvalued, or fairly valued compared to its competitors. In this part of the series, we’ll discuss Domino’s relative valuation as compared with Papa John’s (PZZA), Pizza Hut’s parent Yum! Brands (YUM), and Chipotle Mexican Grill (CMG). CMG has high same-store sales growth much like Domino’s and Papa John’s.
Some of these restaurants are included in the Consumer Discretionary Select Sector SPDR Fund (XLY), whose portfolio includes about 10% restaurant stocks.
The price to earnings ratio, which is calculated by dividing the company share price by its EPS (earnings per share), is 30.7x. This is below the comparison group average of 31.6x. The lower the PE ratio, the more undervalued the company. So, we could say that Domino’s is fairly valued compared to most of the group, but only according to one measure. And that’s not enough.
Domino’s PEG (price to earnings growth) ratio is 2.3x—high compared to the 1.9x average. PEG is calculated by dividing the PE ratio by the annual EPS growth. This gives us a clearer picture of the PE ratio and helps us determine a company’s valuation. Usually, if the company’s PEG ratio is above 1x, it indicates that the market is pricing the company higher than it’s actual growth rate.
Enterprise value to earnings before interest, tax, depreciation, and amortization, or EV/EBITDA takes into account the enterprise value, which includes debt. Domino’s EV/EBITDA is 17.2x, also above the group average of 16.4x. The lower the value, the more undervalued the company.
Looking at these three valuation ratios, Domino’s appears to be in the range of fair to overvalued, as you can see in the chart above. So, how has Domino’s stock performed over the years? We’ll discuss this in detail in the next part of this series.