Domino's Downgraded By KeyBanc's O'Cull: Here's Why

KeyBanc downgraded Domino’s Pizza Inc DPZ from Overweight to Sector Weight on Friday. In the accompanying report, analyst Chris O’Cull explains that the company's rising share price now fully reflects the positive aspects of KeyBanc’s outlook.

Fully valued
Domino’s stock is now up 23 percent in 2015, and many of its current valuation metrics, including its P/E ratio of 37.7, are at or near 10-year highs. O’Cull believes that Domino’s recent execution and its above-average growth prospects warrant a premium valuation relative to other restaurant stocks. However, KeyBanc sees a risk of multiple contraction back toward long-term averages.

Strong fundamentals
Despite the downgrade, O’Cull remains confident in Domino’s underlying business fundamentals. KeyBanc is forecasting 22 percent earnings growth in 2015 and at least 15 percent annual earnings growth over the next few years. In addition, KeyBanc’s same-restaurant sales (SRS) growth projection of 9-10 percent and its global unit expansion projection of 7 percent make Domino's the fastest-growing restaurant in KeyBanc’s coverage.

In addition to strong growth and earnings projections, KeyBanc also expects Domino’s to return $300 million in buybacks and dividends this year. “We remain highly confident in the near- and long-term fundamentals and would return to a more constructive view on a pullback or if the share price stagnates over time,” O’Cull explains.

Outlook
KeyBanc is currently projecting 2015 earnings per share (EPS) of $3.52 for Domino’s. The firm is also calling for 2016 EPS of $4.00, but believes that up to $0.18 of upside to that estimate could be provided via debt refinance.