🍕Business Overview

🎯Key Metrics

Total: 9/17

• +2 ✅ Projected Operating Margin: 20.22%
• +0 ⚠️ Projected 5-Year Revenue CAGR: 4.92%
• +2 ✅✅ Last 5-Year ROIC: 82.83%
• +1 ✅ Estimated Cost of Capital: 8.14% (less than ROIC)
• +1 ✅ Last 5-Year Shares Outstanding CAGR: -1.79%
• -1 ❌ Projected 5-Year EPS CAGR: 9.87% (given the easiness of “manipulation” of EPS growth below 10% represents a slight negative)
• +1 ✅ Projected 5-Year Dividend CAGR: 10.47%
• +1 ✅ Estimated Debt Rating: A3
• +2 ✅✅ Morningstar Moat: Wide
• +0 ⚠️ Morningstar Uncertainty: Medium

Domino’s Pizza is a great brand, enjoying a wide moat that results in an operating margin of around ~20%. Given the maturity of the business, its revenue growth is below 10% but still modestly above the economy growth rate. Its franchise business model and disciplined capital allocation decisions also result in a stellar ROIC around 10 times its cost of capital. The reduction in shares outstanding over the last five years has also increased each shareholder’s ownership stake (“pizza slice”) in the company.

📈Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values;
• Historical P/FCF – we assume mean reversion to the historical P/CF values;
• Historical P/E – we assume mean reversion to the historical P/E values.

I’ll put more weight on the DCF method and only then the others. As you can see, despite Domino’s being a reliable dividend payer I’ll not value the company based on divdiend growth and respective payments, given the fact the its payout ratio of ~20-30% would undervaluate the company considerably.

Cost of Capital

I’ve used the latest annual and quarterly financial statements of the company, the 10-Year US bonds as the risk free rate and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody’s does not provide a rating for this company we’ll estimate it by passing its Operating Income (Earnings Before Interest and Taxes – EBIT).

Cost of Capital: 8.14%.

These values will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 45%)

I’ve used the latest and annual and quarterly financial statements of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of US), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Terminal Cost of Capital – I’m assuming that the company starts at the previously estimated cost of capital and then will converge gradually to the average cost of capital of its industry;
• Initial and Terminal Tax Rate – Given the maturity of the company and its values very close to the industry (19-20%) I’ve set both values to the industry average;
• Terminal ROIC (Advanced Inputs) – I’ve set this value to 40%, below its historical averages but still very high. In my opinion it didn’t make sense for this value to become Cost of Capital (~7-8%), however I’ll use a larger range on the following Monte Carlo simulations to allow for that uncertainty.

All the other inputs were taken or from the financial statements or from analyst projections.

The DCF gives us an estimated fair value of 484.13 dollars for Domino’s Pizza.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates.

As you can see from the above Domino’s Pizza seems to be a little undervalued or at maximum fairly valued given that its current price of 338 dollars is around P20. From these simulations we can extrapolate that there’s 80% probability that the stock is undervalued at the current price.

As always take this single output, from this valuation method, with a grain of salt. Let’s move on to the other valuation methods to get a clearer picture.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

EPS Growth (Weight: 25%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 22 PE for Domino’s Pizza, so a little above its current averages but still below its historical average of ~30 .

Then again, I used the Monte Carlo simulations to check how the estimated fair value changed as my assumptions were modified.

Using this valuation method, Domino’s Pizza that is currently priced at 338 dollars seems to be undervalued, being currently priced a little below P10. Given this we can extrapolate that there’s more than ~90% probability of Domino’s Pizza being undervalued.

This is in line with the previous DCF valuation.

Let’s continue to the historical comparisons to elucidate us a little more.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

EPS Scenario Returns

We can also use the scenarios above to check on how the returns would be:

Historical EV/EBITDA (Weight: 15%)

The current EV/EBITDA ratio is below its 10 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 21.49 we can assume a fair value of 440.39 dollars.

For every type of historical and relative valuation you can use the same free tool: Historical / Relative Valuation – The Fair Value Journal .

Historical P/CF (Weight: 10%)

The current P/CF ratio is below its 10 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 30.72 we can assume a fair value of 486.54 dollars.

Historical P/E (Weight: 5%)

The current P/E ratio is below its 10 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 30.81 we can assume a fair value of 462.19 dollars.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I would start buying the company below the 367.90 dollars, given the maturity, stability, wide moat of the business and the capability of the company to deliver great value to its shareholders.

Please remember that the fair value estimate has a 100% probability of being wrong and it will never be a precise number, even if it has decimals next to it 😮

However, overall, Domino’s Pizza seems to be undervalued or at least a little undervalued at its current price.

Fair Value: 408.07 dollars