Domino's (DPZ) is the reigning champion of fresh, hot, customized pizza delivered right to your door. Domino's operates over 8,000 franchised and company-owned stores in all 50 U.S. states and in 50 countries. Revenues totalled $1.5 billion in 2005, up 4.5% from the previous year. Since going public in 2004, the stock has increased 100%, hitting its all-time high of $28.75 this past May. A recent pull back in Domino's stock price just below $26 presents a window of opportunity for investors seeking to make an investment in a quality business with quality earnings valuations to match.

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Brand Strength

Domino's is positively a mega brand as demonstrated with it marketing affiliations with Coca-Cola and its recent anointment as the official pizza of NASCAR. Domino's has spent approximately $1.3 billion to ensure that customers thinking of pizza think of Domino's pizza first.

With the NASCAR season underway and the NFL football season rolling into its 4th week, hungry fans moving inside from the frigid air of the fall season are likely to dial their local Domino's or visit one of its local retail franchises.

Weakness/Opportunities
Domestic same store sales for Domino's during the first half of the year fell 7% from a year ago, while international same store sales climbed 4%. Domino's international sales currently represent only 10% of total revenues, highlighting the prospects available for future growth abroad. Domino's has nearly 3,000 international franchises that generate royalties which contribute to its top line growth.

Mexico, United Kingdom, Australia, South Korea and Canada have the greatest number of Domino's stores followed by Japan, Taiwan and India to round out the top 10 international locations. Through June, Domino's has enjoyed 50 consecutive quarters of same store sales growth in its international operations.

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Financial Strength
Domino's operates largely as a carry out and delivery food service. By eliminating places for people to sit, Domino's is able to keep real estate costs down and focus on product preparation and delivery.

Domino's is trading at 15 times earnings, below the industry average of 17, while its much smaller direct competitor Papa John's (PZZA) is trading at 21 times earnings. DPZ's below industry average PE ratio and its low PEG (price-to-earnings growth) ratio are good indicators of an undervalued stock.

In March, Domino's repurchased 5.6 million shares of stock from Bain Capital LLC, reflecting management's positive sentiment towards its business. The stock buy back will improve Domino's EPS figures and support its current stock price as the remaining outstanding shares now hold more value. Bain Capital still owns 28% of Domino's outstanding stock.


Threats

The biggest threat to Domino's future is domestic saturation and customer aversion for convenience. Investors will have to pay attention to domestic same store sales figures which should rebound with falling gas prices and jam packed sports weekends. Convenience, on the other hand, is here to stay and Domino's recognizes this trend by allowing its customers to build and order their pizza the way they want it online.

Conclusion
While Domino's does compete with Papa John's and Yum Brand's (YUM) Pizza Hut domestically, it has been able to maintain its crown with quick delivery service and good tasting pizza pies delivered hot and on time. The apparent growing popularity of pizza lovers abroad could reap big dividends for investors focused on the quality of Domino's low cost business strategy.

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