Should you order Domino’s Pizza stock?

Domino‘s Pizza (NYSE:DPZ) has been delivering for investors in a big way over the past few months, as its stock price has jumped about 24% since Nov. 1.

The nation’s largest pizza chain is surging this week too, up by about 3% since the close of the market on Friday. Let’s take a look to see what has been fueling Domino’s gains and whether it might continue to deliver.

A return to normal?

Domino’s stock has been aided recently by a slew of upgrades from analysts. This week, analysts at Gordon Haskett upgraded Domino’s to a buy and raised their price target to $467 per share, while Morgan Stanley (NYSE:MS) maintained its overweight rating and bumped its price target up from $455 to $465. Stifel and Barclays have also upgraded Domino’s to a buy this year, and the overall consensus of the 30 analysts that cover it is that the stock is a buy with a median price target of $452 per share. That would be about a 7.2% gain over its current stock price.

A lot of the positive sentiment stems from an improving macroeconomic outlook for restaurants, particularly quick-service restaurants (QSRs) that appeal to cost-conscious consumers, like Domino’s. With inflation coming down, labor shortages easing, and an expectation for fewer supply-chain disruptions, analysts see things starting to return to normal in 2024 following a tough past several years. According to a report from Technavio, the global pizza market is anticipated to grow at a compound annual growth rate of 6.2% through 2027.

More specifically as far as Domino’s is concerned, there are some promising signs that it can maintain its momentum. At an investor day in December, the pizza-delivery chain unveiled a growth plan that called for 7% annual sales growth, 8% profit growth, and 5,500 net new stores from 2024 through 2028. It also calls for 3% annual same-store sales growth, which analysts at Gordon Haskett call conservative based on its catalysts and growth drivers.

That projection would be up from a 1% year-over-year decrease in same-store sales in the U.S. in the most recent quarter and on par with a 3% increase in international same-store sales last quarter.

Partnership with Microsoft

One of the major new initiatives for Domino’s stems from its partnership with Microsoft (NASDAQ:MSFT). Through this partnership, Domino’s will leverage Microsoft’s generative AI and cloud computing to enhance the ordering process through personalization and streamline operations for store managers.

Through the first nine months of 2023, Domino’s saw its net income climb 23% to $362 million. Over the past 10 years, its earnings have grown consistently, aside from a post-pandemic dip. In that 10-year period through Sept. 30, the pizza-delivery chain’s net income has increased by an average of 14% per year on an annualized basis.

One concern is with Domino’s debt, which has steadily risen since the start of the pandemic and now is at about $5 billion. At the same time, its cash and cash equivalents have dropped to about $295 million. The good news is that Domino’s free cash flow has increased to about $364 million from $279 million through the first nine months of 2022, so hopefully, as earnings increase and things start to normalize, it can continue to manage its debt.

Overall, Domino’s is a pretty decent value, trading at around 28 times earnings, similar to where it was at the start of the year. Based on its projected growth and its earnings history, it looks like a decent option. The company is set to report its fourth-quarter and fiscal-2023 earnings on Feb. 26, so that may shed more light on its outlook and prospects.