Wall Street analysts are increasingly optimistic about Domino’s Pizza (ticker: DPZ) as the company prepares to release its earnings report on Monday. Projections for the quarter ended in June indicate a predicted 1% increase in same-store sales compared to the previous year, with earnings expected to grow by 8% to $3.06 per share. However, investors and analysts are focusing on the company’s long-term potential rather than short-term results.
In a recent announcement, Domino’s revealed plans to allow U.S. customers to place orders through Uber Eats and Postmates apps later this year. This development has led to a wave of positive sentiment from analysts, prompting at least a dozen of them to raise their price targets for the stock.
Chris O’Cull, an analyst from Stifel, upgraded his price target for Domino’s shares from $350 to $450. O’Cull believes that the partnership with Uber Eats will contribute to sales growth over the next three years and predicts that Domino’s will form a similar alliance with DoorDash once its exclusive deal with Uber expires in 2024.
Drawing comparisons to similar deals in the past, BTIG analyst Peter Saleh suggests that Domino’s could experience a mid-single-digit increase in sales. For instance, Papa John’s saw third-party platforms account for 7% of sales two years after partnering with DoorDash in 2018.
Saleh wrote in a research note last Wednesday, “We see no reason why Domino’s can’t experience a similar mix with UberEats as the partnership rolls out nationally,” increasing his target for the stock to $465 from $400.
Bank of America analyst Sara Senatore also raised her price target for Domino’s shares to $465 from $415, stating that the Uber Eats partnership could potentially boost same-store sales by 6% in its first full year.
Domino’s CEO, Russell Weiner, shared his optimism about the collaboration with Uber during an interview with The Wall Street Journal, stating that the goal is to generate $1 billion in new sales through listing menus on Uber’s apps. O’Cull estimates that this could result in $45 million in annual EBITDA, or $1 in earnings per share.
Overall, the market sentiment surrounding Domino’s Pizza is currently positive due to its partnership with Uber Eats and the potential for significant sales growth in the coming years.
Profitability for Uber Eats Orders on the Rise
However, despite these advantages, Domino’s shares have taken a hit since reaching an all-time high in December 2021. The company has faced stagnant sales due to high inflation, which has left consumers with less disposable income to spend on dining out. Additionally, a labor shortage has resulted in fewer available drivers for food delivery.
Fortunately, there is some optimism surrounding the economic landscape as commodity prices have started to decrease. In a note by Saleh, it was mentioned that historically, a 40-cent change in cheese prices could impact restaurant margins by one percentage point. In the second quarter alone, block cheese prices decreased by an average of 71 cents compared to the previous year.
This improvement in profitability could be a game-changer for Domino’s, as it allows them to better compete in a tight labor market and attract more drivers. According to Saleh, the company believes that an acceleration in sales, coupled with deflation in commodity prices and improved labor availability, will lead to franchisee profit recovery this year. In turn, this could drive accelerated domestic development and ultimately result in a significant increase in the company’s share price.
Despite currently trading 32% below its record high, Domino’s stock is still valued at 30 times earnings—making it only slightly cheaper than its peers such as Papa John’s, McDonald’s, and Yum! Brands (owner of Pizza Hut). However, if analysts’ predictions for 2023 and 2024 earnings growth prove accurate, the stock could see a promising upward trend.