Investors may want to reconsider buying Domino's Pizza, Inc.'s (NYSE: DPZ) stock at current levels as shares are trading at its highest valuation in at least four years, according to Gordon Haskett.
The Domino's Pizza Analyst
Jeff Farmer initiated coverage of Domino's Pizza with a Hold rating and $320 price target.
The DPZ (NYSE: DPZ) Thesis
DOMINO'S STOCK has gained 20% over the past two weeks alone and trading at 23 times 2021 estimated EBITDA which is the highest seen in years, Farmer wrote in the note. The stock at current levels is discounting two things, including ongoing moderation of third-party delivery competitors, and 2020 estimated U.S. same-store sales growth will come in ahead of current estimates of 3.7% by a large margin.
The research firm doesn't agree with the second point and expects same-store sales growth to come in at 4.2%. While this is ahead of current expectations, the company will see difficulties in showing incremental upside as management's "fortressing strategy" headwinds are likely to remain. Specifically, management lowered its long-term U.S. same-store sales growth outlook from 3% to 6% to 2% to 5% back in early October due to a "sales drag" in the fortressing strategy.
Bottom line, Domino's is likely to continue delivering superior sales growth versus its peers over the coming years and this justifies a "healthy valuation premium" -- but one that is "modestly below current levels," the analyst wrote.
DPZ Price Action
Shares of Domino's Pizza were trading lower by 2.64% Friday afternoon at $338.85.