Domino's Versus Pizza Hut: Investing Edition

While consumers continue debating the Domino's versus Pizza Hut argument, Gregory Badishkanian is debating the investment argument between the two pizza companies in a head to head five part battle.

Domino's stands to benefit from its "Pizza Theater" remodels and its "best-in-class" technology offerings. In fact, the company has already benefited greatly as it embarked on a multi-year effort to improve the quality of its food and value offerings. Domino's saw its 2014 same-store sales grow 7.5 percent in 2014 while its average franchisee profitability of $89,000 rose 8.5 percent in 2014. Meanwhile, Pizza Hut is seeing an improvement in sales from its Flavor of now relaunch and the restaurant chain has "likely seen the worst" and entering a period where it can see upside from here.

Domino's roughly 6,800 international locations fall short of Pizza Hut's 7,800 locations. While Domino's should continue to see benefits from its international reimages through 2017, Pizza Hut's "significant" footprint and "heavy concentration" of company-owned stores in China should provide a boost to tis results as it continues to recover from last year's food safety incident in China. Meanwhile, Pizza Hut continues to shift unit development plans towards lower tiered cities to gain market share outside of the major cities.

Domino's digital sales (i.e orders placed through an app) accounted for $4 billion in sales globally (40 percent of total company sales) while 50 percent of total U.S. sales in 2014 came from digital initiatives. Meanwhile, Pizza Hut's digital sales continue to fall short of management's expectations, but other companies under the Yum Brands umbrella (i.e Taco Bell) are reporting "meaningful" mobile capabilities which could help improve Pizza Hut moving forward through sharing of technology and best practices.

Domino's domestic franchisee profitability has grown at a nearly eight percent compounded annual growth rate since 2009, leading to a six percent increase in total domestic franchised units and a 68 percent increase in international units over the same period. Meanwhile, Pizza Hut operates a nearly 100 percent company-owned model in China and has seen cash-on-cash returns of 22 percent in Tier one and two cities and 25 percent return in Tier three to six cities with further plans to increase the level of lower tier openings over the next few years. With that said, the "attractive" economics of Pizza Hut's Chinese market helps offset softness in the domestic business.

Finally, Domino's stock has had a "stronger" performance and is likely to show more consistent growth over the next two years. However, its valuation "appears to largely incorporate the favorable company fundamentals." Meanwhile, Yum Brands remains a "China-based story" with a long run way for growth and trades at a 19.5x P/E multiple on the analyst's 2016 estimates versus Domino's 27.0x multiple. Shares of Domino's remain Neutral rated with an unchanged $119 price target. Shares of Yum Brands remain Neutral rated with an unchanged $93 price target.