Domino’s Pizza: Demand Weakness Concerns are ‘Overblown’, UBS Upgrades to Buy

By Senad Karaahmetovic

UBS of Domino’s Pizza (DPZ) to Buy from Neutral as they see the risk/reward as attractive.

Demand weakness concerns are “overblown,” UBS argues in the upgrade note. The bank sees catalysts that could accelerate US sales trends while also citing compelling long-term growth profile as factors that prompted him to upgrade DPZ shares to Buy. Moreover, UBS’ survey results showed solid demand for pizza and Domino’s.

“We see near-term catalysts to accelerate DPZ sales from: expected upcoming price increases on select promos, efforts to improve driver staffing shortages, and potential 3P delivery partnerships. Additionally, we believe DPZ should exhibit above avg resiliency in a pressured spending environment given leading value positioning and a very affordable dinner option for families,” UBS said in a client note.

Aside from the U.S. market, UBS lauds “best-in-class” global unit growth.

“We believe solid cash-on cash returns, fortressing success, and a store footprint w/ manageable competition & relatively low cannibalization (just 70 bps impact & trending lower) remain supportive of US unit growth accelerating to ~3-4%. Int’l whitespace, franchisee strength & brand positioning drive our est. ~7-8% growth outside the US, for ~6% global development.”

The bank also slashed the price target to $385 from $430 per share to reflect lowered 2022/2023 estimates that reflect macro challenges and FX headwinds. Still, the new price target implies over 20% upside potential in DPZ shares.

DPZ shares are up over 3% in pre-open Tuesday.

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