Is This Eye Catching Play on Mobile a Buy or Sell?

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With Domino’s Pizza (NYSE:DPZ) recently announcing third quarter financial results and explaining the impact of mobile in its business model, is the pizza giant a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

E = Earnings Are Increasing Quarter-Over-Quarter

Domino’s, the second-largest U.S. pizza chain, reported that third quarter net income grew to $26 million (44 cents per share) in the most recent three-month period, compared to $22.1 million (36 cents per share) a year earlier. Excluding items, the company earned 43 cents per share, topping analysts’ estimates by 2 cents.

Looking over the past eight quarters, Domino’s has beaten estimates every time with the exception of two quarters. It missed estimates by 2 cents earlier this year, and met estimates in early 2011. However, earnings have not been increasing quarter-over-quarter. The most recent earnings of 43 cents was a decline from 47 cents in the previous two quarters. In the fourth quarter of last year, it posted earnings of 52 cents per share.

In the recent earnings release, it is also important to note that the company repurchased and retired 189,718 shares of its common stock, totaling almost $6 million and reducing the amount of shares outstanding by 5.4 percent. Buybacks are often seen as a sign that a company believes in itself, but they are also used as a way to enhance earnings. On the positive though, Domino’s increased revenue to $378.1 million, compared to $376.3 million. Analysts were expecting revenue to come in at $375 million.

C = Catalyst for a Stock’s Movement

Aside from the obvious need to eat and the expanding waistlines in America, Domino’s develops new products to keep customers coming back for more. After receiving glaring feedback about its pizza tasting like cardboard, Domino’s announced in late 2009 it would be changing its recipe to improve quality. The move worked as investors and customers welcomed the transformation.

Shares of Domino’s jumped 90 percent the following year, and 112 percent in 2011. This year, shares are up nearly 20 percent and the company has yet another new pizza. Domino’s has developed a new Handmade Pan Pizza, and will be giving away half a million free samples to promote it.

“Domino’s spent three years perfecting this product and raising the bar for pan pizza, so we felt there was no better time for us to launch our biggest sampling event ever,” said Chris Brandon, Domino’s Pizza spokesperson. “Our goal is to give as many people as possible the opportunity to experience the fantastic taste of our new Handmade Pan Pizza made with fresh, never-frozen dough. We hope everyone experiences love at first bite.” One in every five pizza’s sold in the United States is a pan pizza. Hand-tossed pizza is still the company’s core product, but the new pan pizza allows it to compete in more product segments.

T = Trends Support the Industry in which the Company Operates

Although Domino’s is viewed as a restaurant play, it is capitalizing on perhaps the biggest trend taking place around the world. After recent financial reports from tech companies such as Microsoft (NASDAQ:MSFT), Yahoo! (NASDAQ:YHOO) and Apple (NASDAQ:AAPL), there is no denying that mobile devices are catching fire.

While many companies are still trying to figure out how to fully monetize mobile, Domino’s is already doing so. The company has been able to reduce labor costs by allowing customers to place orders on its website. It also offers a free app that allows customers to use their mobile device to place an order for delivery or carryout. This feature in our digital age has impacted results in a positive way.

Patrick Doyle, chief executive officer, explains on the conference call, “So while store growth and new store designs are important in setting us apart from the competition, another key element of our success continues to be technology. Our international master franchisees lead in many ways. In Australia, 40 percent of digital orders are now through mobile devices. In the U.K. digital orders are now 58 percent of delivery sales, with total digital sales up by 39 percent in the third quarter versus the prior year. Here in the U.S. our digital platforms continue to perform well and set us apart from the competition, particularly the smaller players. About 40 percent of our delivery orders come through from digital and that continues to grow. Roughly a third of our total orders come through digital channels now. Consumers love our digital ordering, so improving and expanding this ordering platform will continue to be an important focus of our strategy.”

Conclusion

Domino’s is a company that can thrive in good and bad times, as people of all walks of life enjoy pizza. It was established in 1960 and has worldwide brand recognition. Although the pizza business may appear to be boring, it still has catalysts through new dishes and mobile reach. However, shares have already outperformed the market for this year, and have logged even bigger surges in previous years. Furthermore, shares trade at a higher multiple than other consumer food companies such as Yum! Brands (NYSE:YUM) or McDonald’s (NYSE:MCD). The liabilities on the balance may also become a concern down the road, as Domino’s spends more than a third of its income from operations on interest expenses. Considering these factors, we believe Domino’s is a STAY AWAY at current valuations.

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