Why Maxim Is Downgrading Domino's: Shares Pricing In Market Share Gains, Comp Growth

Domino's Pizza, Inc. DPZ shares have surged 23 percent year-to-date. Maxim’s Stephen Anderson downgraded the rating for the company from Buy to Hold, citing valuation. The analyst maintained the price target at $138.

Beating Competition

Domino's is estimated to have gained 160 bps share in the pizza quick-service category over the past 12 months, significantly above any of its peers, analyst Stephen Anderson mentioned. This compares with market leader Pizza Hut’s 56 bps of share contraction during the same period.

Domino's generated 7.2 percent new unit growth, outpacing the 4.7 percent growth at Papa John's Int'l, Inc. PZZA and 2.9 percent at Pizza Hut, which is owned by Yum! Brands, Inc. YUM.

Lower Operating Costs

A decline in food and other operating costs is likely to offset the negative impact of a strong USD. Although management projected commodity costs to be flat to up 2 percent in 2016, Anderson believes these would track toward the lower end of the projected range or even lower than that.

Valuation

“We argue that DPZ’s outsized market share gains in the U.S. against peers, the company’s ability to lap double-digit comp growth with another quarter of similar magnitude, and its accelerated unit development worldwide still warrant above-peer valuation multiples,” the analyst wrote. He added, however, that shares had jumped 32 percent since the January 2016 lows, and appear to be factoring in these positives.