Domino’s Pizza Stock Down 6% Today – Time to Buy DPZ Stock?

Domino’s Pizza stock is shedding nearly 6% of its value in pre-market stock trading action this morning following the release of the company’s Q3 2021 earnings report as its top-line results missed analysts’ estimates for the period.

For the three months ended on 12 September, Domino’s reported sales of $998 million or 3% higher than the same period a year ago. This growth was primarily fueled by higher demand from its international franchises. Analysts were expecting revenues of $1.03 billion for the period according to data compiled by Seeking Alpha.

Overall, international sales grew 19.6% while US stores experienced a rather disappointing 1.1% advance. Moreover, the company reported a 1.9% decline in same-store sales in the United States compared to an 8.8% jump in the same metric for international stores.

Meanwhile, the company reported a 21.5% increase in its net income for the quarter along with a 30% jump in its adjusted earnings per share which landed at $3.45 per share since over 2 million shares were repurchased in the past 12 months. These bottom-line results beat analysts’ forecasts of $3.1 per share for the period.

During this third quarter, the company repurchased a total of 391,007 shares while $920.3 million remain to be purchased based on the amount authorized by the Board of Directors recently.

Can this downbeat earnings report result in the beginning of a downtrend for Domino’s Pizza stock? In the following article, I’ll take a look at the price action and fundamentals of the company to possibly answer that question.

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Domino’s Pizza Stock – Technical Analysis

A quick look at the Domino’s Pizza stock chart shows that a descending triangle formation has emerged after the company reported its Q2 2021 earnings report. Back then, Domino’s beat both earnings and revenue estimates for the period but bulls were not able to hold on to those post-earnings gains as the share price declined in the weeks that followed.

Only days ago, the price bounced off the $470 level and formed what could be a double bottom pattern. Trading volumes in the past few weeks have remained fairly close to the 10-day average but the price action remains below the stock’s short-term moving averages.

Momentum oscillators, on the other hand, are currently neck-deep on oversold territory with the Relative Strength Index (RSI) just bouncing off the 30 level while the MACD has made a U-turn and seems poised to cross above the signal line on steadily declining negative histogram readings.

Today’s report will possibly catalyze the next move for DPZ stock and the fact that US sales are exhibiting signs of weakness is not positive for the company’s short-term outlook.

With that in mind, if the price of DPZ stock drops below the $470 threshold the downtrend may accelerate in the next few weeks – possibly aiming for a full-blown return to the 200-day simple moving average, which is standing at $435.4 per share. This implies an 8.5% downside risk.

Domino Pizza Stock – Fundamental Analysis

US sales for Domino’s Pizza represent around a third of the firm’s revenues not including supply chain income. Therefore, a sustained drop in the company’s sales from this important region could have a sizable impact on its revenue-generation capacity in the future.

US-based company-owned stores exhibited the strongest decline in same-store sales as they retreated 8.9% compared to a 16.6% advance back in the third quarter of 2020. What this metric indicates is that even though new stores (45 net new stores opened in the US) lifted the firm’s overall US revenues, existing stores did not perform well in these past three months.

During the pandemic, Domino’s deliveries pushed US sales higher. However, now that consumers are hitting the streets once again on the back of en-masse vaccinations, that tailwind could be fading and that affects the short-term outlook for the business.

Moving forward, analysts’ revised estimates for Domino’s will likely play a key role in shaping the stock price. In this regard, some downward price target revisions might be expected as a result of lower revenue estimates for the next twelve months.

Currently, the company is trading at 32 times its forecasted earnings per share for the next twelve months. In the last 5 years, Domino’s has managed to grow its earnings per share from $4.3 to $12.4 per share at a compounded annual growth rate of 30%.

A portion of this attractive growth has been the result of ongoing share repurchases as the firm’s diluted weighted average outstanding shares has declined from 49.9 million in 2017 to 39.6 million last year.

Since the company’s free cash flow generation capacity remains intact, this short-term weakness in its revenue outlook should not be too concerning for investors. However, Domino’s large debt burden remains an important variable weighing on its valuation.

In this regard, the company reported $5 billion in long-term debt for the three months ended on 12 September. However, Domino’s informed that it successfully refinanced a portion of those commitments during the second semester of 2021 and that should alleviate all short-term solvency concerns.

From a fundamental perspective, even though the business has displayed a strong earnings-generation capacity for years, the debt situation has to be closely monitored as any setbacks in the performance of the company may result in a significant deterioration of its solvency.

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