Domino's (DPZ) Losing Altitude After Q3 Profit Miss

Domino's Pizza, Inc. (DPZ) fell nearly 7% in Thursday's session after missing third quarter 2020 profit estimates by a wide margin. The popular fast food chain posted earnings per share (EPS) of $2.49 for the quarter, much worse than expectations calling for $2.77. Revenues rose a healthy 17.9% year over year, while U.S. comparative sales jumped 17.5%, underpinned by pandemic tailwinds that have increased American appetites for tomato pies and their infinite variations.

Operating margin fell from 38.5% to 37.4% as a result of investments and higher labor costs, while commodity fluctuation made it harder to gauge expenses, undermining quarterly metrics. As an example, cheese costs have soared after hitting a multi-year low, causing disruptions in inventory management and cost control. In addition, Domino's stock had already risen more than 45% in 2020, encouraging shareholders to take profits.

Wall Street has grown more cautious due to windfall returns, posting a "Moderate Buy" rating based upon 16 "Buy" and 9 "Hold" recommendations. No analysts are recommending that shareholders close positions at this time. Price targets currently range from a low of $385 to a Street-high $500, while the stock will open Friday's session about $30 below the median $434 target. This positioning should limit downside while encouraging new investors to jump on board.

Domino’s Long-Term Chart (2011 – 2020)

The stock completed a round trip into the 2007 high near $20 in 2011 and broke out, entering a powerful advance that lifted the pizza maker into market leadership. The uptrend held support at the 50-week exponential moving average (EMA) through four intermediate corrections while adding points at a rapid pace. The rally's trajectory eased in the second quarter of 2018, giving way to a more complex decline that hit an 18-month low near $220 in August 2019.

A bounce into December reached the 2018 high, ahead of a February 2020 breakout that got tested severely during the pandemic downdraft. The stock recovered in April and broke out in June, but price action into October generated numerous whipsaws, carving a shallow rising channel that may have undermined positive sentiment. This week's decline is still holding above channel support at $385, but that level could get tested in coming sessions.  

Domino’s Short-Term Chart (2018 – 2020)

The earnings report triggered the highest-volume one-day selloff since July 2019, suggesting that it will take at least two or three sessions for downside pressure to work out of the system. In turn, that raises the odds for a test at channel support, which is likely to hold at least in the short term. In addition, there isn't too much risk below that level because the 200-day EMA is now rising through $365, offering a durable trading floor.

The on-balance volume (OBV) accumulation-distribution indicator has matched price action so far this year, posting an all-time high just ahead of the report. It has also carved a rising channel that is already testing support due to the high-volume decline. An OBV breakdown ahead of price would set off a bearish technical signal, raising the odds for a price breakdown that stretches into support at the long-term moving average. 

The Bottom Line

Domino's missed third quarter earnings estimates this week, triggering the highest-volume sell day in the past 15 months. This suggests that downside momentum will continue, reaching support around $385.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.