Domino’s Pizza, Inc. (NYSE:DPZ) shares are up more than 11.08% this year and recently decreased -0.50% or -$0.89 to settle at $176.88. Del Taco Restaurants, Inc. (NASDAQ:TACO), on the other hand, is down -13.74% year to date as of 11/21/2017. It currently trades at $12.18 and has returned 3.05% during the past week.
Domino’s Pizza, Inc. (NYSE:DPZ) and Del Taco Restaurants, Inc. (NASDAQ:TACO) are the two most active stocks in the Restaurants industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect DPZ to grow earnings at a 19.32% annual rate over the next 5 years. Comparatively, TACO is expected to grow at a 12.00% annual rate. All else equal, DPZ’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 14.13% for Del Taco Restaurants, Inc. (TACO). DPZ’s ROI is 106.30% while TACO has a ROI of 5.10%. The interpretation is that DPZ’s business generates a higher return on investment than TACO’s.
If there’s one thing investors care more about than earnings, it’s cash flow. DPZ’s free cash flow (“FCF”) per share for the trailing twelve months was +1.49. Comparatively, TACO’s free cash flow per share was +0.09. On a percent-of-sales basis, DPZ’s free cash flow was 2.63% while TACO converted 0% of its revenues into cash flow. This means that, for a given level of sales, DPZ is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. DPZ has a current ratio of 1.50 compared to 0.30 for TACO. This means that DPZ can more easily cover its most immediate liabilities over the next twelve months.
DPZ trades at a forward P/E of 25.66, and a P/S of 3.00, compared to a forward P/E of 20.75, a P/B of 1.23, and a P/S of 0.98 for TACO. DPZ is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. DPZ is currently priced at a -18.04% to its one-year price target of 215.81. Comparatively, TACO is -26.45% relative to its price target of 16.56. This suggests that TACO is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for DPZ and 1.60 for TACO, which implies that analysts are more bullish on the outlook for DPZ.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. DPZ has a beta of 0.38 and TACO’s beta is -0.27. TACO’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. DPZ has a short ratio of 4.55 compared to a short interest of 5.01 for TACO. This implies that the market is currently less bearish on the outlook for DPZ.
Domino’s Pizza, Inc. (NYSE:DPZ) beats Del Taco Restaurants, Inc. (NASDAQ:TACO) on a total of 9 of the 14 factors compared between the two stocks. DPZ is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, DPZ has better sentiment signals based on short interest.