By Bill Peters
Even as Domino’s Pizza Inc. stock slumps, it got an upgrade from BMO Capital Markets on Friday, with analysts arguing that customers still want to eat pizza and saying investors’ worries are already priced in.
BMO analyst Andrew Strelzik upgraded Domino’s Pizza /zigman2/quotes/201587798/composite DPZ -0.39% to the equivalent of buy from hold. He kept his $430 price target on the stock, saying it implied nearly 35% upside. Shares rallied nearly 4% on Friday, and were trading at around $332.95.
Strelzik, in a research note, cited BMO’s own survey, which found that 75% to 80% of respondents “indicated intentions to hold or increase spending within the pizza category over the next six months.”
“The idea that consumers may have pizza fatigue seems unlikely as respondentsordered pizza on average ~1 per month over the last six months,” he said.
BMO upgraded the stock as more customers return to prepandemic habits, such as dining out, after restaurant restrictions in 2020 made ordering pickup and delivery — from Domino’s and third-party deliverers like DoorDash /zigman2/quotes/222973991/composite DASH -3.55% and GrubHub — far more common.
The survey also found that customers planned “narrow” spending increases on third-party food deliverers, who in prior years have posed stiffer competition for the pizza-delivery giant. BMO said those findings suggested that competition between Domino’s and third-party deliverers could be reaching a plateau. Nearly 70% of respondents indicated that “prices have gotten too high” on those platforms.
Food prices, broadly, have risen this year. Some restaurants also raised the prices of menu items available to customers for online delivery, in an effort to cover the hefty fees the delivery platforms charge the restaurants for service.
Domino’s in years past has said that its business model, in which its pizza-delivery drivers shuttle to and from a single store, has tighter economics than third-party deliverers. But as those rivals expanded, and as the labor market remains tight, Domino’s has had more difficulty finding drivers.
Strelzik, however, said some signs of a “potentially broadening labor pool” were emerging.
“With inflation reducing discretionary income and headlines of hiring freezes / layoffs, data is beginning to show a potentially broadening availability of the labor pool that could help move DPZ’s delivery driver staffing challenges in the right direction,” he said.
Domino’s Pizza stock is down roughly 42% so far this year. By comparison, the S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.79% is down 23%.