News Analysis date published New: 
Monday, January 3, 2011 - 07:00
New Date created: 
Monday, January 3, 2011 - 07:00
New Date last updated: 
Monday, January 3, 2011 - 07:00

How to Net a 15% Gain From This Fast Food Trade

Monday, January 3, 2011 - 7:00am

Domino's Pizza Group (NYSE: DPZ) is the world's largest pizza delivery chain by market cap.

The pizza company operates more than 9,700 franchised and company-owned stores across the globe and appears set to grow further.

Domino's is booming internationally, especially in India, where 70 new stores were built this year. As the country's number one restaurant chain, same-store sales were up 41% in the first half of 2010.

In the United States, same-store sales increased 11.7% in the third-quarter, and the company projects more than 19.2 million pizzas will be sold this year.

Around the world, cost-conscious consumers have been choosing Domino's. That's because, at many locations, customers can buy two medium, two-topping pizzas for just $5.99 each. These pizzas feature a reinvented recipe with sweeter sauce, higher quality cheese and garlic-seasoned crust.

Technically, DPZ appears strong. The stock is in both a major and also an accelerated intermediate-term uptrend.

The intermediate uptrend -- which built off the stock's June $10.66 low -- meets with nearby resistance, marked by the upper Bollinger band at $16.38 to form an ascending triangle. DPZ appears close to bullishly breaking out of this pattern.

The intermediate uptrend runs parallel to the rising 10-week moving average, which intersects at $15.19. The uptrend line also mirrors the rising 40-week moving average, which currently intersects with the rising 30-week moving average, near $13.85. This area is near important support, dating from March 2010.

The lower Bollinger band, which intersects with the rising major uptrend near $12.63, marks key support. If DPZ can surmount $16.38 resistance, no nearby historical resistance is insight, which is a good sign the stock can go higher.

The measuring principle for the triangle -- calculated by adding the height of the triangle to the breakout level -- projects an initial price target of $18.91 ($16.38 - $13.85 = $2.53; $2.53 + $16.38 = $18.91).

The indicators are bullish. The Relative Strength Index (RSI) has been in a major uptrend since December 2009. At 67 it is above the key 50 juncture, but not yet overbought. MACD is on a weak buy signal. The MACD histogram is slowly building in positive territory. Both Stochastics and Williams %R are overbought, but remain on buy signals.

Dominos appears as fundamentally appealing as it is technically.

In late October, the pizza chain reported better-than-expected third-quarter results. Thanks in part to an ad effective campaign promoting Domino's new pizza recipe, revenue for the period rose 14.8% to $347.4 million from $302.7 million in the year-ago quarter. Analysts expected revenue of only $334 million.

Moving forward, Dominos hopes to further boost sales by getting more customers to try its new pizza. With a growing customer base and an increasing international presence, analysts project full year 2010 revenue will increase 12.1% to $1.6 billion from $1.4 billion last year. By 2011, analysts expect sales will increase another 2.3% to $1.6 billion.

The earnings outlook is similarly positive.

Third-quarter earnings were $0.27 a share, beating analysts' expectations of $0.25. This represented a 58% increase from the year-ago period, when earnings were $0.17 a share (excluding special items).

The company plans to continue expanding internationally. Domino's near-term goal is to have 10,000 stores worldwide. With this anticipated growth, analysts project 2010 full-year earnings to increase 54% to $1.34 a share from $0.87 last year. By 2011, it should increase another 8.2%, to $1.45 a share.

In addition to its growth potential, the company is fairly valued based on its trailing P/E ratio of 11. By comparison, competitor Papa John's (NYSE: PZZA) has a slightly higher trailing P/E of 14.6.

Although Domino's currently has a high debt load, management is taking active steps to reduce debt. In the most recent third-quarter, the company repurchased $20 million in debt.

Action to Take --> Given that Domino's is attractively valued and shows fundamental as well as technical growth potential, you should consider going long on this pizza delivery company. To be on the safe side, you may want to wait for Domino's to break its $16.38 resistance. I would, therefore, place a buy-on-stop order at $16.41. This means if DPZ does not hit or go above $16.41, you will not enter the position. My recommended stop-loss is $14.01, near important support.

Based on the measuring principle, my recommended target for this trade is $18.91, which represents a profit potential of 15.2%.

Melvin Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.