Is Domino's Pizza Stock Too Cheap Here? Analysts Think So

Domino's Pizza Inc. (DPZ) stock has fallen since its April 27 Q1 earnings release. It delivered strong free cash flow and FCF margins. Moreover, analysts have higher DPZ price targets. One play is to sell short nearby put options.

DPZ closed at $316.47 on Thursday, May 21, down 16.88% from a recent peak of $380.77 on April 6. However, it's up slightly from a recent trough of $302.29 on May 15. Is its drop overdone? It seems so, as this article will show.

Strong Revenue and FCF Margins

Domino's Pizza had positive Q1 revenue and free cash flow (FCF) results. I discussed this and its FCF margins in an April 28 Barchart article, “Domino's Pizza Stock Drop May Be Overdone, Based on Its Strong FCF Margins.”

For example, its revenue was up 3.5% YoY, and U.S. same-store sales were up 0.9%. However, its international same-store sales fell 0.9%. That could be contributing to some of the negative market feelings about DPZ stock.

As a result, Domino's Pizza generated lower free cash flow (FCF), i.e., down 10.6% to $147 million. However, as I pointed out in my article, this still represented 12.77% of revenue.

Moreover, for its trailing 12 months (TTM) ending Q1, its FCF margin was 13.14%, according to Stock Analysis. That was higher than a year ago (12.11%) but lower than the Q4 TTM FCF margin of 13.59%.

It still allows us to forecast at least a 13% FCF margin going forward, based on higher revenue forecasts from analysts.

Projecting Domino's FCF 

For example, Yahoo! Finance's survey of 28 analysts shows that they expect revenue this year to be $5.22 billion, up +5.7% from $4.94 billion in 2025. And for 2027, they forecast $5.4 billion.

That implies over the next 12 months (NTM), the average revenue forecast is $5.31 billion. Therefore, assuming Domino's makes at least a 13.14% FCF margin, as it did over the past year:

  $5.31 billion NTM revenue x 13.14% FCF margin = $698 million FCF

Let's round that up to $700 million in FCF. As a result, assuming the market gives this a 20x multiple (equivalent to a 5% FCF yield metric):

  $700m x 20 = $14 billion market value

Fair Value and Price Targets for DPZ

That is +33% over its existing market cap of $10.526 billion, according to Yahoo! Finance. In other words, DPZ stock could be worth 33% more than its price today:

  $316.47 x 1.33 = $420.91 price target

However, just to be conservative, let's set a lower range multiple of 18.18x (i.e., equal to a 5.50% FCF yield metric):

 $700m x 18.18 = $12,726 million (i.e., $12.726 billion)

That is 20.9% higher than today's $10.526 billion mkt cap. So, the revised price target is:

  $316.47 x 1.209 = $382.61 price target (PT)

So the range is between $383 and $421, or $402 at the midpoint. That is +27% higher than Thursday's close.

Other analysts agree. For example, Yahoo! Finance reports that the average PT for 32 analysts is $406.10. Similarly, Barchart's mean survey PT is $407.59, and AnaChart's survey is $456.48.

The bottom line is that DPZ stock looks way too cheap here. However, there is no guarantee it won't get cheaper or just stay at this level.

So, one way to conservatively play DPZ is to short out-of-the-money (OTM) put options in one-month expiry periods. That way, an investor can set a potentially lower buy-in point and get paid while waiting.

Shorting OTM DPZ Puts

For example, the June 18 expiry period shows that the $300.00 put option strike price has a midpoint premium of $4.95. That strike price is 5% below Thursday's close, i.e., the put option is “out-of-the-money” (OTM). 

But, it provides a short-seller of this strike price an immediate yield of 1.65% (i.e., $4.95/$300.00). This is because the short-put investor receives this income immediately.

This means that if an investor secures $30,000 in cash or buying power with their brokerage firm, they can “Sell to Open” 1 put contract. Their account will immediately receive $495.00.

Moreover, even if DPZ falls to $300.00 by June 18, and the account is assigned to buy 100 shares, the breakeven point is lower:

  $300.00 - $4.95 = $295.05 breakeven

That is 6.77% below Thursday's closing price of $316.47, as the premium received lowers the potential buy-in point. In other words, it is an attractive way for an investor to buy DPZ stock.

The bottom line is that selling short out-of-the-money (OTM) DPZ puts in one-month expiry periods is an excellent play for value investors.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.