Is Domino’s Pizza the Best Restaurant Stock?

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Since the financial crisis, Domino’s Pizza (NYSE:DPZ) has been one of the best-performing restaurant stocks. Over the past five years, shares have risen by nearly 700 percent. Furthermore, if you look at the company’s most recent earnings report, it is evident that it is staying the course: it increased its profits, revenues, and margins as it continues its global expansion as the world’s largest pizza delivery chain.

However, like most high-growth and momentum stocks, Domino’s Pizza shares have pulled back as of late. After peaking at about $80 per share in March, the stock is down to $71 per share. Whether you are bullish or bearish, there is no denying that the stock needed to pull back, as it had risen too far too fast. But is now the time to get in, or is there more downside to come?

One of the appeals of Domino’s Pizza is that unlike some of its peers — notably Chipotle Mexican Grill (NYSE:CMG) — the company hasn’t been hit by higher commodity prices. This has been a big deal for a lot of the restaurant companies, as it forces them to decide between raising their prices and risking customer alienation, or keeping prices steady and seeing profits decline. Domino’s Pizza hasn’t seen this yet, as the company saw a 9 percent increase in its total sales and a 15 percent gain in net profits excluding extra items.

However, this could reflect the fact that while agricultural commodity prices were up during the first quarter, they were down year over year. Thus, even though the company showed margin growth, I still think we could see the company suffer margin contraction in the next few quarters if commodity prices don’t come down.

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