Domino’s Pizza, Inc. (NASDAQ: DPZ) failed to measure up to investors in 2022. As a result, the stock fell more than 33%. This is significantly higher than the S&P 500 index, which shows an annual loss of 19%.
The company faced rising ingredient costs and difficulty finding drivers due to rising inflation. This showed up in the company’s earnings reports. As a result, earnings have exceeded expectations over the past four quarters.
But analyst sentiment is improving. And in this article, we’ll explain why it might be time for investors to take a bite out of DPZ shares as they trade below their pre-pandemic price.
Pizza has pricing power
One of the main reasons for analysts’ optimism is that Domino’s will enter 2023 with its highest prices in more than a decade. And analysts believe the company has room to raise the prices of its $7.99 deferral deal and its $6.99 Mix & Match deal.
This occurs when analysts believe that the company’s ingredient costs are about to level off or decline slightly. This combination will support higher margins, more substantial profits and a higher share price.
Define the true cost of pizza delivery
Consumer spending on pizza delivery hit a new all-time high of $19.8 billion in 2021, according to Statista. from $14 billion in 2020 to $11 billion in 2019.
And the United States spends $11 billion a year on pizza delivery. But, of course, it’s just a pizza delivery, not a total food delivery. And Domino’s has the largest market share, with 31% of the actual amount consumers spend on pizza.
But this growth comes at a cost. Specifically, the company is struggling to find and pay drivers in a tight labor market. However, analysts say the current wave of layoffs, hiring freezes and continued inflation will likely increase the candidate pool of willing drivers.
And even if that’s not the case, the company says there’s evidence that inflation is causing consumers to avoid having pizza delivered. However, the company is also reinstating its “delivery advice” this holiday season, which may have the combined effect of boosting demand while helping the company resolve delivery issues.
Is it time to buy DPZ shares?
Strictly based on value, there may be better options right now. The stock still has a P/E ratio above the sector average. However, if the company hits expectations of high-single-digit earnings growth over the next five years, Domino’s could hit that valuation.
And while you wait, Domino’s is giving you a tasty dividend. While the 1.23% dividend yield may not be so exciting for investors, it can be misleading. The company pays $4.40 per share, has a sustainable payout ratio of around 33%, and has increased its dividend in each of the past ten years.