Analyst Note| Sean Dunlop |
We’re raising our per share fair value estimate on wide-moat Domino’s Pizza to $386 from $350, attributable to a lower cost of equity assumption (to 7.5%), partly offset by the incorporation of our 26% U.S. statutory tax rate forecast. Our cost of equity rating is consistent with other heavily franchised operators in our coverage. Domino’s benefits from a steady stream of royalty-based payments that link to system sales, while reduced exposure to volatile input costs diminishes margin uncertainty (largely labor and food inflation). In our view, quick-service restaurants are recession resistant, as value-oriented operators tend to outperform premium concepts during periods of economic uncertainty. However, Domino’s shares still appear overvalued at current levels, which exceed our fair value estimate by approximately 18%.