Does Domino’s Pizza, Inc.’s (NYSE:DPZ) Stock Price Account For Its Growth?

Looking at Domino’s Pizza, Inc.’s (NYSE:DPZ) fundamentals some investors are wondering if its last closing price of $244.27 represents a good value for money for this high growth stock. Let’s look into this by assessing DPZ’s expected growth over the next few years.

Check out our latest analysis for Domino’s Pizza

What can we expect from Domino’s Pizza in the future?

Investors in Domino’s Pizza have been patiently waiting for the uptick in earnings. If you believe the analysts covering the stock then the following year will be very interesting. Expectations from 19 analysts are buoyant with earnings per share estimated to rise from today’s level of $8.648 to $12.715 over the next three years. On average, this leads to a growth rate of 11% each year, which indicates a solid future in the near term.

Is DPZ’s share price justified by its earnings growth?

DPZ is trading at price-to-earnings (PE) ratio of 28.25x, which suggests that Domino’s Pizza is overvalued based on current earnings compared to the Hospitality industry average of 21.21x , and overvalued compared to the US market average ratio of 17.61x .

NYSE:DPZ Price Estimation Relative to Market, March 18th 2019
NYSE:DPZ Price Estimation Relative to Market, March 18th 2019

We understand DPZ seems to be overvalued based on its current earnings, compared to its industry peers. But, to properly examine the value of a high-growth stock such as Domino’s Pizza, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 28.25x and expected year-on-year earnings growth of 11% give Domino’s Pizza a quite high PEG ratio of 2.64x. Based on this growth, Domino’s Pizza’s stock can be considered overvalued , based on fundamental analysis.

What this means for you:

DPZ’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Financial Health: Are DPZ’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has DPZ been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of DPZ’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.