Domino's Concerns Overblown and Already Priced In – Stock Upgraded at BMO Capital Markets

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By Vlad Schepkov

A BMO Capital Markets analyst upgraded Domino’s Pizza (NYSE:DPZ) from 'Market Perform' to 'Outperform' and maintained a $430 price target on the shares, citing strong consumer survey readings, improving labor market conditions, and the stock’s attractive valuation.

In his most recent note on the company, the analyst lists several key trends the pizza giant is expected to benefit from:

- A recent proprietary survey of consumers showing respondents 'expect a net increase in pizza category spending over the next six months, with the strongest net increase expected at DPZ.'

- Same poll suggesting 'pizza fatigue seems unlikely as respondents ordered pizza on average ~1 per month over the last six months.'

- Improving labor market conditions, that may help ease one of Domino's key overhangs: 'Data is beginning to show potentially broadening labor pool availability that could help move DPZ's delivery driver staffing challenges in the right direction.'

The analyst further highlights the stock’s recent underperformance and as he believes all major 'concerns already discounted into shares.'

He sees current valuation – 'DPZ shares currently 1) are near multi-year lows; 2) trade at 17x 2023E EBITDA, below typical 17.5x trough multiple over the last five years; and 3) trade near 10-year low multiple relative to S&P 50' – as compelling and offering an 'attractive risk/reward… against the backdrop of lowered expectations.'

BMO Capital Markets reiterates that 'DPZ is an attractive growth vehicle driven by its strong sales growth opportunity, premium brand, digital leadership, and attractive cash flow.'

Shares of Domino's closed at $320.14 yesterday, implying a nearly 35% upside from current levels.