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        Domino's Pizza $DPZ - Down 40%, and still expensive

        Domino's Pizza was founded back in 1960, and since then, it has grown to become the largest pizza company in the world.
        How does Domino's Pizza make money?
        61% Supply chain (Selling food, equipment & supplies to the franchisees)
        13% U.S. Franchise royalties and fees
        11% U.S. franchise advertising
        8% U.S. Company-owned stores
        7% International franchise royalties and fees
        Historical financial performance & Balance sheet
        Domino's Pizza is one of the most stable companies margins-wise. Over the last decade, the operating margin was between 17% and 18%.
        Over the last twelve months, the total revenue was close to $4.5 billion, growing at around 5%/year. This is translating to over $800 million in operating profit.
        How can Domino's Pizza grow?
        One of the questions I'm always asking is, what does it take for this company to grow? How can the operating profit increase from $800 million to $1 billion, to $2 billion? Here are a few options, and my thoughts on each:
        - New locations The company isn't opening new locations, the U.S. growth will be limited, and there's nothing the management can do to increase the demand for franchising internationally without sacrificing the margins.
        - Selling more through existing locations This is quite optimized as there's very little increase YoY that is not attributable to inflation.
        - Improve margin As the operating margin has been between 17% and 18% for over a decade, it is unlikely that this is a lever the management can pull.
        Assumptions and valuation
        Here are the assumptions that I use in the DCF model to value Domino's Pizza:
        Revenue: 6% growth/year until year 5, then slowly decreasing to 3%. This is a combination of 2-3% location growth + inflation.
        Operating margin: 18% (in line with the historical profitability)
        Discount rate: 8% (WACC-based)
        After adjusting for the cash/debt on the balance sheet, and the equity options, the company is worth $9.6 billion ($274/share).
        For comparison, the market cap today is $11.9 billion ($341/share).
        Based on my assumptions, the IRR offered is 6.1%.
        Domino's Pizza $DPZ - Down 40%, and still expensive
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