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Why Domino’s Stock Uptrend Might Not Hold

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Nov. 26 2019, Published 11:56 a.m. ET

Domino’s (DPZ) stock has risen about 21% since the company posted its third-quarter earnings on October 8. Domino’s Q3 performance was disappointing, with both its revenue and EPS missing Wall Street’s expectations. The company missed analysts’ sales estimate for a fifth consecutive quarter.

Despite the company’s weak performance, Domino’s stock is rising. However, we believe that may not continue in future quarters. The stock’s high valuation and recent uptrend could limit any upside. Furthermore, analysts’ average target price implies DPZ stock may even fall slightly.

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What’s in the cards for Domino’s stock

Domino’s new $1 billion share buyback program gave its stock a big boost. The company also cut its 2019 G&A (general and administrative) outlook to $380 million–$385 million from $390 million–$395 million, further lifting investor sentiment.

We believe the company’s square footage expansion, share repurchases, and lower costs could boost its bottom line in the fourth quarter. Analysts expect Domino’s earnings growth to accelerate sequentially in the fourth quarter, and to grow by a double-digit percentage year-over-year. We think Domino’s stock’s recent surge reflects the above positives.

However, analysts expect Domino’s adjusted EPS to increase by about 14% in the fourth quarter before moderating to around 8% and 6% in next year’s first and second quarters, respectively. The slowdown could limit Domino’s stock.

Furthermore, DPZ stock trades at a forward PE multiple of 27.6x, which is above the peer group average of 26.8x. Its forward EV-to-EBITDA multiple of 20.6x is also higher than peers’ average of 17.2x.

What analysts recommend for DPZ stock

Most of the analysts covering Domino’s stock have a positive outlook. However, their average target price shows no upside. In fact, their average target of $284.39 for DPZ implies an approximate 3% downside based on its closing price of $293 yesterday. Of the 27 analysts covering DPZ stock, 14 suggest “buy,” 12 suggest “hold,” and one suggests “sell.”

Domino’s stock is up 18.1% year-to-date. In comparison, Papa John’s (PZZA) and Yum! Brands (YUM) are up 55.3% and 6.6%, respectively. The S&P 500 has risen 24.1% this year.

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