There are two ways to think about a stock on sale: The price could simply be down from its high, or the valuation could be cheaper. These two considerations often coincide but not necessarily.
For this article, pizza-chain Domino’s Pizza (NYSE: DPZ) and fintech company Wex (NYSE: WEX) are down 42% and 18%, respectively, from their all-time highs. Moreover, both stocks are underperforming the S&P 500’s returns over the past five years, which isn’t encouraging.
However, Domino’s business remains strong, and Wex’s business is booming more than ever. Further, because these businesses are still good and their share prices are down, their valuations are about the cheapest they’ve been at any point over the last decade, as we’ll see.
Here’s why Domino’s Pizza and Wex are worth considering today.
Revenue for Domino’s was only up 4.1% in 2022 to $4.5 billion. And its net profit margin dipped from 11.7% in 2021 to 10% in 2022. But don’t let these recent lackluster numbers mislead you. Domino’s can still reward shareholders long term.
It’s dangerous for investors to value Domino’s stock on a sales basis because much of its revenue isn’t very profitable. Its two largest sources of revenue are from its supply chain and advertising — the supply chain is low margin, and its advertising fund is zero margin. Additionally, the money the company makes from company-owned restaurants is better but, likewise, low-margin. This leaves just franchise royalties and fees — only 19% of total revenue — for producing strong profits.
In all, Domino’s has nearly 20,000 locations, most of which are franchised. However, management sees a path for its franchisees to open more than 10,000 locations worldwide long term, providing a growth opportunity. This should help continue to grow its high-margin franchise revenue stream.
Turning to the bottom line, Domino’s earned $12.53 per share in 2022, just a 7% drop even though net income fell 11%. The reason for the disparity is that the company reduced its share count by about 1.6 million shares through share repurchases. And as of this writing, it’s authorized to use around $400 million to repurchase more.
As franchisees open new locations and the share count drops, Domino’s earnings per share (EPS) could rise. And as EPS rises so too can the company’s dividend.
Turning to the stock, Domino’s stock trades well below its 10-year average price-to-earnings valuation. Moreover, its dividend yield is low at under 2%, but it’s near its highest ever. Both metrics make now a more opportune time to go long on Domino’s stock.
Seven months ago, I called Wex my top value stock. It’s slightly cheaper now, so I’m either really wrong or the market is offering investors an increasingly better opportunity. And I believe it’s the latter because business is still good for Wex.
For those unfamiliar, Wex has a three-pronged business. The company processes fuel transactions for fleets, recording important data for enterprises. It also processes transactions related to business travel, mitigating fraud. And it manages health benefit programs via its software-as-a-service (SaaS) platform.
Here’s why I like Wex: Fuel and travel transactions are regular occurrences, and its SaaS platform is subscription-based revenue, which is why management considers 80% of its revenue to be recurring. Therefore, this is a resilient business model.
Moreover, Wex is growing. Its revenue of almost $2.4 billion in 2022 was at an all-time high and up 27% from 2021, which is a strong growth rate. Its growth forecast is muted for 2023 with the broad economic slowdown — management expects 3% to 5% year-over-year top-line growth. However, by attracting new customers, cross-selling products, and finding acquisition targets, management believes it can grow 10% to 15% annually for several years beyond 2023.
Finally, Wex is profitable, with $426 million in operating income in 2022. And management plans to reward shareholders with share repurchases when appropriate. It repurchased about 1.9 million shares in 2022 for about $291 million, and it’s authorized to use about $500 million more.
Wex stock trades well below its 10-year average price-to-sales valuation despite its respectable growth rate, which is why you don’t have to wait for a market crash to buy — shares are currently inexpensive.
Market pullbacks often provide top stocks at a discount, and I believe that’s the case with Domino’s and Wex. Both businesses are doing well even though their stock prices are down. And that’s a good thing for investors willing to buy and hold shares for the long term.
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