GeoInvesting prepared the following thesis in late April for submission to the Sohn Conference Idea Contest with when Domino’s Pizza Inc. (NYSE:DPZ) shares traded near $138. It was selected as a finalist, so we had to wait to publish the full report until after the May 4th, 2016 conference ended.  Since our submission, shares of DPZ have fallen significantly (over 10%) following the company’s recent earnings report and we have updated the report we submitted to the Sohn Conference.

We continue to believe an additional 34% downside to DPZ is possible as this is a highly-leveraged company with negative equity of about ($1.7 billion),with its ability to push out margins further being called into question if commodity prices increase off their historical lows and if the company faces issues dealing with imminent minimum wage hikes.

Summary

  • We think an impressive five-year run in Domino’s Pizza (DPZ) stock could be reaching its inevitable end and that a “perfect storm” of factors may make DPZ a lucrative short.
  • Domino’s is an overvalued and leveraged company in a high flying sector of a market near all-time highs.
  • With a free cash flow (“FCF”) yield of just 2.6%, DPZ generated just $128 million in levered FCF during the ttm period versus the company’s gargantuan $2.2 billion debt load.
  • The company will face headwinds in wage increases and eventual volatility in commodities; the company has already been fined numerous times in NY for wage violations.
  • Domino’s could have up to 34% downside simply to recalibrate it with its peers.

To see our full exclusive report, please go here.