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Is Domino’s Pizza The Best Consumer Stock To Watch During The Pandemic?

Consumer stocks have been hit the hardest during the pandemic. The pandemic hasn’t been kind to retailers, especially dine-in services. And because most people stay home during the pandemic, delivery services have seen a huge uptick in their business. Among them, the world’s largest pizza delivery company, Domino’s (DPZ Stock Report) could be in for some big surprises in a few days. The pizza delivery leader will be reporting its earnings results for the period where maximum social-distancing efforts were in place. DPZ is one of the hottest consumer stocks to watch this year, gaining 40% in just over six months. Will investors get burned considering that DPZ stock has been baked to its current level?

It’s no secret that Domino’s business has seen huge orders during the coronavirus pandemic and restaurant closures due to lockdowns. The pizza maker has been seen as a go-to-choice for consumers whose dining options became limited. The rally put Domino’s well ahead of many fast-food chains such as McDonald’s (MCD Stock Report) and Yum! Brands (YUM Stock Report). Domino’s competitor Papa John’s Pizza (PZZA Stock Report) has posted similarly strong gains so far this year.

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An Extraordinary Quarter For DPZ Stock

Many investors initially worried about signs of slowing growth for Domino’s. This came as many fast-food chains focus on online ordering or home delivery services. But Domino eased those concerns in late February by showing rebounding demand trends. In fact, comparable-store sales were up over 20% in April and May. This shows the pizza maker’s robust growth amid the pandemic. As many smaller F&B providers scale down their businesses amid weakening conditions in the restaurant industry, Domino’s is well-positioned to win a larger slice of the pie. But the question here is, can Domino’s beat Wall Street’s estimates again this Thursday? Here are a few things to take note of if you are a potential DPZ stock investor.

consumer stocks to buy (DPZ stock)

Domino’s Market Share In The Pizza Industry

One of the most important things, when we look for a company to invest, is to look at earnings growth. After all, surging profit levels is what most investors are going after. Investors want their investments to make more money, the more the better of course. Preferably, double-digit earnings growth, as it often signals strong prospects for the potential upside of stock prices. 

As much as investors like to see a spike in their sales growth, the more important trend investors should look at is the market share it has managed to capture thus far. How bullish DPZ stock can also depend on how Domino’s fends off its competitors with its industry-leading position and efficient selling model. Any insights on their market share will reflect Domino’s competitive posture.

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Strong Cash Flows Ensure Domino’s Stock Stays At The Top

Cash is the lifeblood of all businesses. This is especially true for companies in the growth stage than those that are already mature. That’s because high cash flow enables these companies to undertake new projects without raising expensive funds. Right now, the year over year cash flow growth for Domino’s is 9.2%, which is far higher than the industry average of 3.1%.

It is also imperative for investors to look at the historical rate too to put the current numbers into context. The company’s annualized cash flow growth rate has been 17.7% over the past 5 years versus the industry average of 5.9%. This is especially crucial for a company like DPZ. While the growth has been stellar in its core market, other international markets have taken a hit from the pandemic. That’s because the company has to implement new operational measures to maintain its business. These include ending two-person deliveries, shutting stores while they restock, and spending money on PPE equipment. This has incurred additional costs which have more than offset the benefits from the increased sales.

Bottom Line

Despite being one of the best consumer stocks in the stock market, the outlook for the second half of 2020 remains cloudy. The company has warned investors to brace for a slowdown during the second half of 2020. After all, those head-turning growth numbers can’t continue indefinitely. Shall the conditions remain weak in the restaurant industry, many smaller food delivery companies may scale back their businesses amid a weaker economic climate. That means Domino’s could still win more market share going forward.

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