360 Degrees of Domino's

Editor's note: In this edition of "360 Degrees," RealMoney commentators take a look at Domino's Pizza (DPZ). Shares of the pizza-delivery chain rose steadily from the company's IPO in 2004 through March of this year, but have since dropped about 20%. Has the stock gone stale, or can we expect it to heat back up?

TheStreet.com has always believed that offering a wide variety of opinions and viewpoints -- rather than a monolithic "house view" -- helps readers make better-informed investment decisions. In that spirit, we bring you "360 Degrees."

"360 Degrees" is a feature that takes advantage of our varied stable of contributors to RealMoney, who offer analysis of stocks and the markets from all angles -- fundamental vs. technical, short-term trader vs. long-term investor.

Click on the following link for information about a free trial to RealMoney.

Pizza Guy, by Frank X. Curzio

This is an excerpt from a column that was originally published on RealMoney on July 11 at 8:32 a.m. EDT

Domino's ( DPZ), which began trading on the New York Stock Exchange in July 2004, is the largest pizza delivery company in the U.S. It operates through a network of 8,079 stores in 50 countries and all 50 states.

Domino's has many advantages over chief rival Papa John's ( PZZA), including brand recognition with top marketing affiliates such as Coca-Cola ( KO) and Nascar. Domino's also has a strong international presence, which can be compared with those of Starbucks ( SBUX), McDonald's ( MCD) and Yum! Brands ( YUM).

Because Domino's is not an eat-in restaurant, it operates more efficiently than competitors. It essentially provides the same product mix while using less square footage and fewer employees. Domino's and Papa John's are both expected to grow at 11%, but Domino's trades at just 13 times next year's earnings, compared with 21 times for Papa John's. Given Domino's competitive advantages, this valuation gap will be remedied over time.

Jim Cramer's Anno Domino's

This is adapted from the recap of the July 24 episode of "Mad Money" published on RealMoney.

"What should you do when you make a bad decision based on what a CEO says or what a 'Cramer' says?" Cramer asked viewers Monday.

"A lot of Wall Street analysts will pretend that nothing is wrong and that they got the timing wrong, which is 'right' deferred," he said. "That's not how it is done on 'Mad Money.' Let me tell you what to do."

Cramer used Domino's Pizza as an example of a stock he had recommended on the basis of bullish comments by the company CEO. He recalled the current advertising campaign that offers any three items from the Domino's menu for $6 each.

"If you hadn't bought Domino's stock, you would have been able to afford those three items with those toppings," he said, alluding to the fact that the stock had declined significantly after his bullish call.

"So what do I do?" he asked.

"I think you buy more," Cramer said. "This is not just Cramer refusing to admit he's wrong. At $22 now, I think buying Domino's is right," he said. "When most people have this happen to them, they act irrationally and sell or act irrationally and refuse to sell."

But this is one case in which investors should act rationally and stay invested, he explained.

"If Domino's hit a wall and people stopped eating pizza or Domino's had saturated the market for pizza," then that would be a reason to sell, he said.

"Domino's isn't much of an eat-in place, so they have lower real estate costs but can sell pizza for the same low prices of its competitors," Cramer said, adding that the company's profit margins would be higher. "I think the long-term thesis is good."

Challenging Cramer's Call on Domino's, by Scott Rothbort

Editor's note: The following article is a special bonus for RealMoney and Street.com readers. It first appeared on Street Insight on July 25 at 9:18 a.m. EDT. To sign up for Street Insight , where you can read Mr. Rothbort's commentary in real time, please click here.

Jim Cramer had some very interesting points concerning Domino's Pizza last night. Jim said that Domino's should be bought here, now that it has fallen precipitously from its highs in April. Jim was bullish on DPZ back in 2005 and is sticking with the stock. As for me, I have chosen a different route.

I bought the stock at various times just after the IPO through the fourth quarter of last year. I took some profits along the way. When the company reported its most recent quarter, I decided to take the rest of my gains, admitting my failure to sell near the top. I believe that the company's problems go beyond those that Jim pointed out.

Here are some of the challenges that lie ahead for DPZ:
  • Sales in the U.S. are indeed slowing as the company has hit maturation.
  • There is no catalyst for the firm until the NFL is up and running in September. Unfortunately, the NFL effect tends to be later in the season, after the weather has turned colder.
  • The distribution business is faltering as cheese prices drop.
  • The company is piling on debt to buy back stock.
  • There are also troubles at Pizza Hut, which is part of Yum! Brands (YUM). This signals that there may be systemic issues in the pizza biz.

I think that Domino's is a good stock, but it will take at least one quarter for some of the issues to get resolved at the company. I believe that it will revisit its 52-week low of around $20.50, which occurred in the fourth quarter of 2005. At that time, I would be inclined to be in agreement with Jim's opinion of Domino's and re-enter the stock.

Wait for Domino's to Confirm Support, by Dick Arms

Click here for larger image.
Source: Metastock

In mid-June, this stock looked as though it had started to turn up. Volume increased, and so did the trading range as it started to rally. However, as the market slumped, it broke down with very heavy volume. It fell to the old support level of last September, with an Equivolume entry that gave the impression of a washout at the old lows. (For a primer on Equivolume charts like the one above, click here.)

Now, after a small rally, I wouldn't be surprised to see it drop back to support at $21 before gathering strength for a further advance. The big box and the gap last week make me want to own the stock if it can confirm the support. But until I see the aforementioned pullback and holding action, followed by renewed strength, I'm willing to wait and let the stock tell me its story. A possible low isn't enough of a reason to buy a stock -- it has to give a sign of strength.

Richard Arms is a renowned stock market technician who invented the Arms Index (often referred to as the TRIN), which has become a mainstay of market analysis, appearing in The Wall Street Journal and Barron's. Arms also developed the widely used technical method Equivolume Charting.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO.

Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial.

Scott Rothbort has 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

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