Yahoo Finance 4 Reasons Domino's Pizza (DPZ) Keeps Delivering Growth
While Alphabet (GOOG) may have its self-driving vehicle and Oscar Meyer boasts its Weinermobile, Domino's Pizza (DPZ) is not to be outdone.
The popular pizza chain last year introduced an oven car -- a specially designed vehicle outfitted with an oven that keeps pizzas warm as they are being delivered.
While Domino's is only starting to roll out the vehicles -- they're in a few cities, including Seattle, Boston and San Diego -- it's representative of the way the company has defied expectations over the past three years. Investors have seen DPZ stock rise 177 percent in that period, as its investments in technology and international growth are proving profitable.
Does Domino's stock have enough room to speed forward in 2016?
Mobile technology separates DPZ from the pack. While the kitsch of the oven car may not appeal to every investor, Domino's has done a remarkable job on the technology front. It's aggressive in creating ways for customers to place their orders on various platforms, including smart televisions, Ford Motor Co. (F) vehicles and on Twitter (TWTR) through emojis. A hungry customer doesn't have to look up the number and call -- he can order a pie on a smartwatch or over a plain boring Internet browser.
"They have more ways to access the brand than competitors," says BTIG managing director of restaurants Peter Saleh. "Where they are really taking share is from regional operators."
While Domino's, Yum Brands-owned Pizza Hut (YUM) and Papa John's International (PZZA) dominate as the national brands in pizza, between 50 and 60 percent of the market share includes local pizzerias and chains.
But smaller businesses have fewer resources to adapt to changing technology and ordering, which gives Domino's an advantage. Domino's earns 55 percent of U.S. sales through orders online or via mobile platforms, says Stephen Andersen, an analyst at New York City investment firm Maxim Group.
And it's catching up with Pizza Hut's market share. Domino's increased its market share from 9 percent to 12.3 percent since 2014, while Pizza Hut slipped from 14.7 percent to 14.4 percent.
The price war has had little impact. Some fast food chains are trying to one-up each other when it comes to pricing quick meals. Wendy's Co. (WEN) kicked things off last year with a four-for-$4 deal. Others followed suit, including Carl's Jr. Restaurant Brands International-owned Burger King (QSR) and even Pizza Hut.
Domino's has done little to react to this trend. "The bulk of the fast food efforts are at breakfast or lunch," says Longbow Research analyst Alton Stump. "There's not as much direct exposure" for Domino's.
True, Dominos offers some menu items for $5.99 (if you buy two or more), but Pizza Hut offers a similar, lower-cost option.
Low-cost offerings have a tendency to cut into profit margins, but Dominos has been immune to that effect -- in fact, revenues have jumped 23 percent since the company introduced its low-cost menu in 2013.
There's still room for improvement. Only 7 percent of Domino's sales come from countries outside the U.S., including the U.K., India and South America. But this is where investors see the most potential moving forward.
"It's a very long-term plan, but there's still a lot of geography out there," Andersen says. The company saw an 11.7 percent jump in the number of stores in 2015, and expects to add between 7 and 8 percent annually for the foreseeable future.
One area it's only beginning to penetrate is China. Pizza Hut has had the first-mover advantage in the country and Yum is preparing to spin off its China-focused business. But while Pizza Hut has developed a more of a bistro-like approach in China, Domino's can focus on delivery. And there's room to grow -- Dominos has only a handful of stores in China, but Andersen speculates it could have more than 1,800 by 2030.
It's a pricey purchase. With a current price-to-earnings ratio of 38, DPZ stock is well above the industry average of 28 and the Standard & Poor's 500 index average of 18.
"Domino's is definitely not cheap," Saleh says. "It's near the most expensive it has been in over 10 years."
It's notable that Domino's repurchased $600 million worth of shares in 2015 -- a strong signal that the company believes DPZ stock still has room to grow.
Hopes are that the impact of mobile technology and the new international stores will continue to push revenues and profits upward. There's reason to be optimistic, but "you're paying for that growth," Saleh says.
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