J.P. Morgan Comments On Domino's Pizza 1Q Earnings

According to J.P. Morgan, Domino's Pizza

1Q earnings were high quality, including a major comp surprise in the US, which while down 1.4%, was much better than expected/feared as the company lapped an exceptional 14.3% comp domestically in 1Q10. J.P. Morgan said that with a flat unit growth but stable FCF US franchisee base as well as strongly growing international master franchisees (including 4 well-capitalized public companies), it believes that operating income growth in the 3-5% range longer term is very achievable. “In addition, low capital investment (9% of EBITDA in F12) allows high FCF yields including 9% in F12 on current equity value. As the company continues to approach what we believe is a sustainable debt level of 4x forward EBITDA by the time current securitized debt matures (April 2012), we believe that this FCF can then be fully be directed towards shareholders. As such we use a 13x multiple on F12 earnings to arrive at our revised price target of $23 vs. our previous $21. Importantly, our model assumes the current 5.9% cash borrowing rate after refinance but given the premium on current debt, the company may very well realize a lower rate. Every 50bp reduction in rate we estimate would add $0.05 to F12 EPS (assuming the lower rate in 2Q12). Further, our model does not contemplate levering up as done historically, and each turn of EBITDA taken as additional leverage is worth ~20% of F12 equity value. For these reasons we continue to rate the stock OW despite strong 34% YTD (S&P +8%) and sharp y/y performance.” Domino's Pizza closed yesterday at $21.30.