2024 has been an underwhelming year for established restaurant stocks. Even the seemingly impenetrable McDonald's is trading flat year to date while the S&P 500 index is soaring. It seems that after multiple years of price increases, customers have gotten fatigued from some existing restaurant concepts.
One established restaurant stock that has weathered the out-to-eat storm fairly well is Domino's Pizza (DPZ -0.69%). With its relatively cheap and delivered pizza offerings, the company has posted positive comparable store sales growth for all but one quarter in the last two years. With over 20,000 stores around the world, the quick-service pizza shop is looking to keep pressing its advantage.
Where will Domino's Pizza stock be in five years? Time to dig into the numbers and figure out whether the stock is a buy today.
Consistent store count growth
Domino's has a steady growth formula that is likely to continue over the next five years. Through its asset-light franchising model -- meaning another company owns and operates the physical restaurant locations -- Domino's expects to open 800 to 850 stores in 2024. It currently has 21,000 locations globally, which might make you think the brand is near market saturation. There are a lot of people on this planet, though, and if you compare Domino's to a competitor like McDonald's with over 42,000 locations, it doesn't look like Domino's will hit a store-count saturation anytime soon.
With inflation and increased customer spending at each location, Domino's should be able to generate at least 2%-3% annual comparable sales growth over the next five years. Last quarter, comparable sales growth was 3% in the United States, although only 0.8% internationally. Domino's has been an innovator in pizza delivery efficiency, which helps it generate millions in annual revenue at each small pizza shop.
Overall, these assumptions line up with Domino's guidance through 2028, which is for 7% annual retail sales growth. Taking this 7% growth figure for the next five years, Domino's annual revenue will reach $6.54 billion by 2030.
Margin expansion and share buybacks
Due to its increasing scale, investors should expect Domino's to expand its operating margin over the next five years. Management is projecting this growth as well, expecting long-term operating income growth of 8%, which is above its 7% annual sales figure.
Even better, Domino's keeps returning capital to shareholders through dividends and share repurchases. Share buybacks will help drop total shares outstanding and increase earnings per share (EPS), while its 1.3% dividend yield can keep expanding along with the business. Domino's has been a heavy repurchaser of stock, with its shares outstanding down 50% since 2004.
DPZ PE Ratio data by YCharts
Should you buy the stock?
As of this writing, Domino's stock trades at a price-to-earnings (P/E) ratio of 28, which is right around the S&P 500 index average. If you think a P/E of 28 is reasonable for a steady grower such as Domino's Pizza (I do), then stock returns will match its EPS growth plus dividend payouts over the next five years.
EPS should grow at a 10% rate due to the 8% operating income growth combined with a falling share count due to the consistent share repurchases. Add in the dividend, and overall shareholder returns can eclipse 10% a year for investors who hold Domino's stock. Compared to a lot of low-growth stocks trading with P/E ratios above 30 or the popular unprofitable hypergrowth software stocks that have caught investors' attention at the moment, Domino's Pizza looks like a good bet for those who want to buy and hold for the next five years.
