This week I've been thinking about the bull case for Domino's Pizza Enterprises Ltd (ASX: DMP).
Shares in the pizza franchisor have been hammered in 2017 and are down 17% compared to a 2% rise for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Still, Domino's has done an incredible job growing investor returns over the last five years so this could be an opportunity to score a bargain. As I see it, this is the bull case for investing in Domino's Pizza today:
A smart business model
Domino's Pizza has a capital light business model which is a great feature. The business requires franchisees to fund initial set up costs and then takes a cut of their sales. This requires less capital investment and lets Domino's execute its growth plans very quickly.
Repeat business
Every year without fail I end up parting with some hard-earned money at my local Domino's. Yes, pizza is probably the greatest sharing food ever invented.
The difference with Domino's though is that the business makes it easy for me as a customer to go back. The ordering process and final products meet my needs quickly and consistently which brings me back time and again.
Pricing power
I see pricing power as one of Domino's most formidable competitive advantages. This works at both ends of the value chain: undercutting competitors on price to increase sales on one end, while bargaining down suppliers to reduce cost at the other end.
We saw this power earlier this year when Coca-Cola Amatil Ltd (ASX: CCL) lost a key supply contract to competitor Pepsi/Schweppes. According to Deutsche Bank the loss could impact Coca-Cola Amatil's volume by about three per cent.
Growing returns and growing stores
The combination of these factors is rocket fuel for shareholder returns. Domino's diluted earnings per share (EPS) in 2016 grew by 26% and that momentum continued into the first half of the 2017 financial year.
The business reported an impressive 30% return on equity and has plans to more than double store numbers by 2025.
Foolish takeaway
For all this, Domino's Pizza commands a premium valuation to its share price. The market is willing to pay more for each dollar of earnings because it expects above average earnings growth down the track.
I haven't examined any of the potential risks here and that would be an important part of any investment case, but I think the bull case for Domino's is compelling and will add the company to my watch-list.
