Domino's Dilemma: Earnings vs. Balance Sheet

Analyzing DPZ as income statements conflict with the company's balance sheet

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Domino’s Pizza, Inc. (NYSE:DPZ) is an extremely popular pizza restaurant chain based out of Michigan. The company is known for its convenient delivery service as well their appetizing pizzas. Domino’s is an internationally known brand with locations all across the globe. 

The pizza chain also happens to be one of the biggest winners shining through during the coronavirus pandemic. While the majority of restaurant chains have suffered huge losses this year due to shutdowns and strict government guidelines, Domino’s has been able to keep the profits rolling in. This stability has supported DPZ stock growth of over 46% year-to-date.

With all the recent excitement around DPZ stock combined with its highly anticipated earnings announcement next week, let's dive into the company’s fundamentals. Domino’s currently has a market cap of $16.80 billion and a book value of -83.43. The company has beat analyst expectations on three of the last four earnings reports. The last time Domino’s missed earnings expectations happened in the third quarter of 2019, with a miss by a slight margin of just $0.02. As for the first and second quarter of this year, Domino’s back-to-back beat Wall Street expectation by a large margin of $0.75.  The company's third quarter earnings are due out on Thursday of next week, and Domino's is expected to report a loss of $0.24 in earnings per share (EPS), with a projection of $2.75.

Domino's company’s trailing twelve month EPS is $11.22, while the company's trailing twelve month price-earnings ratio currently stands at 38.07. The company currently sports a forward price-earnings ratio of 32.05 and a trailing price-earnings ratio of 39.63.

Since 2016,Domino's has produced both revenue and net income growth every year. The company currently has $190.62 million in cash and cash equivalents, as well as $1.38 billion in assets on its balance sheet. However, Domino's has a considerable $4.27 billion in long-term debt as was as $4.80 billion in total liabilities. As such, Domino’s total equity stands at -$3.42 billion.

Finally, let's talk dividends. Domino's offers a small dividend yield of 0.73%. The company has consistently grown and paid this quarterly dividend since 2013. In the most recent quarter, Domino’s paid a dividend of $0.78 to shareholders.

The leadership of the company is raising eyebrows when it comes to its especially high $4 billion in growing debt while continuing to pay dividends. Domino's current CEO, Richard Allison, has 9 years of experience working in various roles for Domino’s, but has no previous experience running a company. In the time Allison has been CEO, company debt has only continued to increase. The company continues to prioritized expansion without regard for its grim balance sheet. While Domino's expansion has been key to the outstanding revenue numbers, investors must remain cautious of the huge debt load that the company is carrying.

It's unpopular to talk about a company's balance sheet, especially when a company is doing well from a revenue standpoint, but things can change very quickly and it is not wise to completely ignore the balance sheet metrics. Overall, for what it is worth, it's unlikely that an investment in Domino’s would be Warren Buffet’s cup of tea. DPZ is definitively not a stock for the more risk-averse investors. Nonetheless, even the bravest investors may benefit from being wary of Domino's growth potential. There is not much room for exponential growth, despite the company’s efforts to continue expanding, and Domino’s is still a pizza chain at the end of the day.

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