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Technical Analysis 101: A Pattern Forms - Diamond in the Rough, $DPZ

Updated: Apr 29, 2021


Thanks for taking the time to read today's blog post. In this series of posts we will identify timely patterns in the market in our Technical Analysis 101 section of the market. This is a great pattern to identify, however rarely seen, and great one to add to your trading arsenal!

In today's post our new intern, Keegan Santasiere, describes the Fundamental Analysis around Dominos Pizza that he pitched in his Core Trading Consultants Group at Ithaca College, then I, Miguel Ferreira, will take a look at the technicals and how we are approaching the trade. Please be sure to read the disclaimer on our site before moving forward, comment below and follow us on Instagram, and twitter!


The 'Fun'damentals

The global fast food and quick service restaurant market (QSR) size is expected to grow at a compound annual growth rate of 5.1% in the next seven years. Dominos has 17% of the QSR pizza market share accounting for $14.3 billion of the $84 billion of global sales in the market. COVID-19 has had a positive impact on consumer purchasing in the industry with a shift towards delivery and online ordering.

The Competitive Landscape:

Dominos Pizza Revenue Growth & Store Comparison to Competitors
Dominos Pizza Revenue Growth & Store Comparison to Competitors

Looking into the QSR Pizza sector Dominos has three main competitions Pizza Hut (owned by Yum Brands), PapaJohns and Wingstop. Dominos is the clear winner in this industry. Dominos has had positive double digit revenue growth the past four years unlike Pizza Hut and Papa John’s. Pizza Hut has a declining revenue and EBITA in the last 12 months causing negative revenue. Papa Johns has had negative revenue growth in the last 2 years and squeaked out a small profit in 2020. Looking at revenue per year, Dominos has increased its revenue per year for the last five years. In comparison to its competitors Papa Johns and Pizza Hut which have fluctuated from mainly flat to declining revenue the last 5 years.

Dominos leads the way in terms of revenue with $3.9 billion in 2019. Pizza Hut which is the second closest competitor to Dominos in terms of store count with 18,703 units only generated $713 million dollars in year to date revenue compared to Dominos store count of 17,256 units with $2.76 billion in year to date revenue. This goes to show how much more efficient Dominos is because they have less stores but much greater revenues. From a multiples standpoint Dominos is trading at fair EBITA to EBITA multiples with the exception of Wingstop who only IPO’d in 2015 so they are still in the rapid growth stages. Dominos is trading under the competitive average in EBITA to EBITA and EBITA to sales multiples showing that they are undervalued.

Dominos Pizza versus its Competitors in Market Cap ($MM), Number of Stores, Revenue, EBITDA Margin, Operating Margin, Enterprise Value, EBITDA, TEV/EBITDA, EV/Sales
Dominos Pizza versus its Competitors

Finally, looking into unit growth, Dominos has a goal of having 25,000 stores by the end of 2025. This is almost 8,000 more stores than they have now. Dominos’ growth strategy consists of fortressing. This means that rather than Dominos expanding into new markets, Dominos is going to continue to grow their stores in existing markets. There are a few contributing economic factors behind this growth. First, they are decreasing their delivery time which in turn is decreasing delivery costs. Second, they are increasing carry out orders as people are closer to the stores and are more inclined to carry out, this results in a higher operating margin. Third, Dominos is able to crowd out its competitors due to their high volume of stores.

Dominos will be able to reach their 25,000 store goal despite the COVID-19 pandemic. According to UBS one in five restaurants will be permanently closing due to the pandemic this means that there will be a significant amount of real estate available. Dominos has already hinted that they are looking for real estate. With a strong cash balance and little short term liabilities, Dominos should be able to further this expansion and reach their 25,000 store goal.


Let's Get Technical!

Why do we look for patterns in the market? To help us identify our thesis and make money in the market!

Patterns are inherent everywhere in nature and life as we discussed in our first blog post.

Human behavior in markets is no different - the buying and selling of anything that has a price (equities, bonds, commodities, cryptocurrency) that is bought, sold and plotted on a chart will show us the patterns we utilize to make the best decisions in the market.

No matter the timeframe - minute by minute, hourly, daily, weekly, monthly, etc. the market creates these patterns over and over again. Why? Human nature. Therefore, we can use these patterns to profit in the market and even foresee potential patterns develop before they ever happen.

So now that Keegan has provided the Fundamentals for Dominos, does the setup in the chart confirm our thesis? Not quite yet... unfortunately. Fibonacci strikes again!!

It's actually creating a quite rare pattern on the daily chart, a diamond chart, where price consolidates in a diamond like shape (fibonacci appears every where in nature, remember!) where after the consolidation of the pattern the price of the stock can move in the direction of the previous trend or do a complete 360, with a reversal in trend, which is called a 'failed breakout' or failed breakdown'.

On the Dominos Pizza daily chart below, we hit the 38.2% fib retracement from the 2020 highs after we gapped down from earnings, the peak of the diamond was created recently when it hit $400. The bottom was created from buying pressures at the 200 SMA. Are break down out of the diamond pattern in the direction of the previous trend from October shows we should go lower. This was confirmed by the divergences in RSI, MACD and Williams %R (yellow lines indicate that on each part of the chart) which helped me want to get short in the first place.

Now, let's zoom out. Using the Fibonacci retracement to compare the retracements from 2019 low to high we can see that the ideal place to enter $DPZ on a longer term basis would be ~$354-353. The solid yellow bars in 2020 show us where support and resistance are on a longer timeframe. The fact that we could not hold above $400 was a big deal, and we will most likely test $370 again, where current bulls would already try to defend their current position.

However, if we fail to hold $370, we will most likely test $354 shortly and we can reassess if it makes sense to get long. On a shorter time frame if we can break over $385 on an weekly or monthly (Nov. 30th) chart than we can get long equity and are looking at the January 15th, 2021 $400 Calls. As always reach out or comment if you have questions on the site or on twitter -> @wizdaytrader or @essex_trading.

In short, ONLY when the fundamentals and technicals line up should we get long the stock. So let's be patient, disciplined and keep our emotions in check waiting for the time to get long.


Essex's Trading Quote of the Day (#EsxQotD)

"We all focus on all the great calls... how about where we cut a position for a small loss before it became a big loss. That's where we should be High Fiving each other!"



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