Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market InsanityThe Junk Pile

Is Domino’s the Most Overvalued Stock in America?

Domino’s Pizza Inc. (NYSE: DPZ) might be the most overvalued stock in America. Shares of the pizza franchiser were trading at $237.16 on 17 April 2018.

That price is ridiculous because Domino’s reported a net income of just $93.33 million for 4th Quarter 2017, and $277.91 million for all of 2017. The company simply is not making that much money; it reported revenues of $2.787 billion for 2017 and $891.51 million for 4th Quarter 2017.

Domino’s also lacks any real resources that would justify the stock price. The chain reported assets of $836.75 million and cash and short-term investments of $277.53 million on December 31, 2017. It also reported debts that exceeded its revenues, the value of those was $3.124 billion. Domino’s annual revenue for 2017 amounted to $2.787 billion.

Is Domino’s Making Money?

Value investors might wonder if there is a lot of cash at Domino’s to justify the stock price there is not.

The company reported a free cash flow of $65.78 million and an operating cash flow of $116.9 for 4th Quarter 2017. That gave it an operating cash flow of $339.04 million and a free cash flow of $249.03 million for all of 2017.

Domino’s is not making that much money. It is a healthy company, but the cash fails to justify the ludicrous stock price. The sorry truth is that Domino’s business is not generating that much cash.

Why Domino’s is in Trouble

The low cash flow at Domino’s is a problem because the company is threatened by a variety of competitors, some of which have greater resources.

Domino’s biggest direct competitors these days are not Yum! Brands’ (NYSE: YUM) Pizza Hut and local pizzerias, but GrubHub (NYSE: GRUB) and UBER EATS. These services are potentially a deadly threat to Domino’s because they can deliver far more than pizza at a competitive price.

GrubHub and UberEats can deliver anything from a fast food burger to a gourmet meal. That threatens Domino’s because there are a now vast number of alternatives to its pizzas that are just as convenient and might sell at a comparable price.

Yes Amazon is a Threat to Domino’s

A greater menace rising fast is the foray of grocers like Walmart (NYSE: WMT), Kroger NYSE: KR), and Amazon (NASDAQ: AMZN) into delivery. Walmart stores, Kroger supermarkets, and Whole Foods stores have delis and some Kroger stores have cafes.

This can give rise to the ultimate menace to Domino’s, a delivery service that can drop off both a precooked hot meal and your grocery order at the same time. Services like Amazon’s Prime Now Delivery can provide convenient one-stop delivery for all the household’s needs.

Walmart is now testing meal kits called One Stop Meals, USA Today reported. Amazon is promising two hour delivery from Whole Foods in Los Angeles. The next logical step is delivery of meals cooked in Whole Foods or Walmart’s kitchens.

One has to wonder how Dominoes can compete with Amazon, Kroger, or Walmart? Combine them with GrubHub and the pizza chain is doomed. This situation adds even doubt to the price of Domino’s stock.

Lawsuits Threaten Dominos

If those problems were not enough there are a couple of federal class-action lawsuits that threaten Domino’s delivery business.

Attorneys are arguing that Domino’s franchisees effectively pay delivery drivers less than the minimum wage. The logic here is that when car costs are deducted from the rate driver’s receive they make less than state and federal minimum wage rates. The main suit is Bodon, Curry, Annunziato et al. v. Domino’s Pizza, LLC  filed by Stueve Siegel Hanson LLP and Weinhaus & Potashnick in the Eastern District of New York.

A similar case has been filed in U.S. District Court in Colorado against DFL Pizza, The Denver Post reported. DFL Pizza operates 22 Domino’s locations in Oklahoma, Colorado, and Wyoming. These suits are a menace because they might double or triple the cost of a pizza by forcing Dominos to provide drivers with a company vehicle.

An added danger is that companies like Amazon might generate enough revenue from the sheer volume of delivery to pay for a company van for every driver, Domino’s franchisees might not. Such costs would become fatal to Domino’s if a company like Kroger; which has pizzerias in some stores, started using Pizza as a loss-leader to get people to use its delivery service.

Investors need to stay away from Domino’s because it is an overpriced stock from a company with an uncertain future. There is no real value here just hype; Domino’s is the most overvalued stock in today’s market.  For a better deal in delivery see GrubHub; or companies like Fiat Chrysler (NYSE: FCAU) which make vans.