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Domino’s Pizza, Inc. (DPZ), Papa John’s Int’l, Inc. (PZZA): Buying This Stock on Weakness

Domino's Pizza, Inc. (NYSE:DPZ)As we move further into earnings season a number of our favorite companies and brands will be positing their second quarter results. One of my personal favorites, Domino’s Pizza, Inc. (NYSE:DPZ) reported its second quarter earnings on Tuesday before the market open and fell significantly after the results. Shares traded lower by roughly 6% after what appeared to be yet another solid quarter from the quick service restaurant leader. In the past I have highlighted the company as a great buy on any significant pullback, however, we haven’t been lucky enough to get one year to date. Shares have moved higher by a whopping 46% this year alone without giving the cost conscious investor a chance to buy on weakness. Since the sell-off shares have rebounded slightly, up 2.5% the day following the announcement even on broad market weakness.

Positive data

In this article I would like to review the company’s most recent quarterly performance, weigh future expansion plans, and lastly take a look at the competitive quick service pizza category. From what I can tell the sell-off was unwarranted; the company reported yet another strong quarter throughout both its domestic and international business segments.

The company was able to grow its earnings per share by over 21% to $0.57 per share, beating analyst estimates of $0.56 EPS. More over, total revenues were up by $37.9 million, or 10.1% from the prior year quarter as a result of two promising tailwinds. First, the company was able to generate additional revenue through increased supply chain demand as a result of higher order counts. Second, the company’s generated higher royalty payments as a result of strong same store sales data and new store openings abroad.

Same store sales came in better than analysts had predicted, the company’s domestic sales rose by 6.7% in addition to 5.8% growth from its international business segment. While the company did add 9 net new stores domestically, this number was completely overshadowed by the addition of 101 net new locations internationally. Even amid rising food costs, 3.9%, the company was able to maintain its operating margins at 30.4%. Overall, I liked the quarter; what’s not to like? Rising revenue, earnings, store counts, volumes, and steady margins amid rising input costs.

The opportunity

The company has made it clear that its domestic growth is not a result of significant broad industry tailwinds. Instead the company is actively taking market share away from its smaller, and larger, competitors through advertising, technology, and product innovation. We have all seen the commercials over the last few years, the “we used to suck, but now we don’t” commercials the company has displayed to audiences across many levels of multimedia. Well, they did suck, now their products are exceptional, and of exceptional value for the consumer. You really can’t beat $5.99 for a one topping carryout large pizza. That same pizza would cost about $19 here at the local joints in the Bay Area.

These same advertising campaigns were structured with a push of the company’s market leading technology platform. Great investments within the company’s online ordering, mobile ordering, and mobile payment technology have started to bear some serious fruit, especially with younger consumers.

The technology advancements have in the words of management taken away market share from its smaller, local competition. If you haven’t had Domino’s Pizza, Inc. (NYSE:DPZ) since the revamp give it a shot. The company has released a number of new products including the extremely successful Pan pizza. The Pan pizza has been an important driver of international same store sales growth within many of the company’s largest markets.

Earlier this year management hinted at its international growth potential, the company stated in its investor conference it can add 2,700 more locations in its top 10 international markets before saturation. Whats even better, this growth estimate doesn’t reflect the potential for growth in the many major Asian market the company hasn’t yet penetrated. The international future for this pizza player looks bright to say the least.

The competition

The competition within the quick service pizza category is stiff; everyone from the mom & pop shops to the big boys are vying for market share. Look, I despise the product portfolio of Papa John’s Int’l, Inc. (NASDAQ:PZZA) but nonetheless, let’s take a look the company. Papa John’s Int’l, Inc. (NASDAQ:PZZA) expects to open 230 to 260 units in 2013 with the majority of these locations in international markets. Earlier this year management stated it would be looking to make a dent in China by the addition of many more stores in the years ahead. With the addition of 500 location over the next five years, the company’s store count is set to nearly triple!

The more diversified quick service restaurant player, Yum! Brands, Inc. (NYSE:YUM), offers investors great exposure to both China and the quick service restaurant category. Through its Pizza Hut brand, Yum! Brands, Inc. (NYSE:YUM) in a strong position to benefit from rising demand for pizza internationally. A number of food quality problems have hurt the company’s reputation over the last year, however, the company has worked hard to re-establish its reputation. On the most recent Domino’s Pizza, Inc. (NYSE:DPZ) conference call management made it clear that rising incomes and employment are the key drivers to pizza sales as pizza is a discretionary good. Rising wage growth within China should bode well for the entire quick service restaurant category within the region.

Conclusion

I would use any weakness as a long term buying opportunity when it comes to Domino’s Pizza, Inc. (NYSE:DPZ). The company just reported a great quarter by all traditional metrics and confirmed yet again the international growth thesis. Its larger competitions have lost market share to the company over the last few years, however, they remain a threat within Asia.

The article Buying This Stock on Weakness originally appeared on Fool.com and is written by Nathaniel Matherson.

Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool owns shares of Papa John’s International (NASDAQ:PZZA). Nathaniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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