(By Mani) Domino's Pizza, Inc.
) has underperformed year-to-date, dropping 13 percent to date. However, market undervalues its accelerating international growth, unique free cash flow profile, defensive operating model and prospects for sustainable double-digit profit growth.
Michigan-based Domino's Pizza owns, operates and franchises pizza delivery and carryout restaurants. The company has over 9,000 restaurants globally, of which 95 percent are franchised.
International business remains strong and is the model's growth engine. The company would add 17 cents to EPS it opens 450 international stores per year accompanied with a 5 percent overseas comp. Early signals suggest 2012 could be a record year for unit builds.
The company opened its 5,000th store outside of the U.S. on June 21. The company operates more than 9,800 stores in 72 international markets. Earlier this year, the company saw its international store count exceed that of the U.S., bringing it closer to that magic number of 10,000 stores.
As of the first quarter of 2012, through its global footprint primarily made up of locally-owned and operated franchises, Domino's operated a network of 9,810 franchised and company-owned stores in the United States and over 70 international markets.
During the first quarter of 2012, Domino's had global retail sales of nearly $1.7 billion, comprised of over $830 million domestically and nearly $855 million internationally. Domino's Pizza had global retail sales of over $6.9 billion in 2011, comprised of over $3.4 billion domestically and over $3.5 billion internationally.
Meanwhile, the company's free cash flow (FCF) is robust and could yield large share repurchases. As of March 25, 2012, it had about $214.7 million of unrestricted cash and cash equivalents, $47.3 million of restricted cash and cash equivalents, $60.3 million of available borrowings under its $100.0 million variable funding notes, net of letters of credits issued of $39.7 million.
"We expect $116M/$138M of FCF in 2012/2013. No stock was repurchased in 1Q as the focus was on completing the refinancing, but we expect major stock buybacks for the remainder of the year. Every $100M of stock buybacks improves EPS by $0.12," Oppenheimer analyst Brian Bittner wrote in a note to clients.
One of the investors concern include the company's European exposure. However, out of top six international markets only one is European (the UK) and the entire international mix is highly diversified.
Bittner said Europe as a whole accounts for only 30 percent of international, franchise revenues and the overall international business model is more defensive than perceived.