Why US Economy Is A Lot Like Pizza Domino
High commodity prices. Weak consumer spending. And heavy borrowing.
If the recent problems of Domino’s Pizza sound a lot like the issues hanging over the broader American economy, it’s no coincidence. With its dependence on consumers, its sensitivity to the run-up in dairy and wheat prices and a risky decision last year to double its debt in order to pay a huge one-time dividend, the pizza chain’s recent troubles speak volumes about the challenges facing both companies and consumers in the year ahead.
But Domino’s trajectory isn’t just another tale of economic gloom and doom. It’s also a story of how large investors — including none other than Michael S. Dell — have kept the faith in the sliding shares of Domino’s, much as they have stuck with the overall stock market despite earnings worries and other fears.
The battle over Domino’s encapsulates the uncertainty facing Wall Street in 2008, with money managers remaining bullish even as veteran strategists like Byron Wien of Pequot Capital Management forecast a recession and a 10 percent drop for the Standard & Poor’s 500-stock index.
So far, at least in the case of Domino’s, the pessimists have the upper hand. Domino’s shares closed Friday at $11.72, down from $20 last summer. And on the first trading day of 2008, Joe Buckley, a Bear Stearns analyst, cut his rating on the entire restaurant group, warning that the combination of higher food and labor costs and slow growth equals a “perfect storm” for the sector.
Mr. Buckley was prescient in getting the Domino’s story right, warning in April that sales could be weaker than Wall Street expected. Since then, he adds, its archrival Pizza Hut has outmaneuvered Domino’s, in part by doing a better job of hedging against soaring prices for cheese, which jumped 42 percent last year.
But there are signs Domino’s is learning how to handle those high commodity prices, Mr. Buckley says. A new contract with cheese suppliers and the ability to more quickly pass on high wheat costs to franchisees might help earnings improve later this year, he says.
With oil hitting $100 a barrel for the first time last week, the ability to manage high commodity prices is a skill other companies will have to master this year.
The parallels with the broader United States economy do not end there. Like more traditional giants, including General Electric and Boeing, one of the few bright spots for Domino’s lately has been international growth. The chain sells distinctly local offerings like the Peppy Paneer in India and the Savoyarde in France, which features potatoes, bacon and crème fraîche.
And, like the broader market — which trades at 14 times 2008 earnings — Domino’s stock is reasonably priced, selling for about 11 times earnings. That is a crucial reason institutional investors do not seem dissuaded by negative news.
In November, the firm that manages the fortune of Mr. Dell and his family, MSD Capital, disclosed that it had acquired a 5.1 percent stake in Domino’s. Mr. Dell’s firm has been an investor for some time, said Lynn M. Liddle, a spokeswoman for Domino’s, but this was the first time its stake rose above 5 percent.
Mr. Dell’s role is hands-off, Ms. Liddle says. “Does Michael Dell come and make pizza? No. I don’t think he speaks to us. His folks do.”
MSD CAPITAL declined to comment on its stake in Domino’s, as did Mr. Dell. But another major holder, Andy Brown of Cedar Rock Capital, remains bullish on Domino’s despite obvious problems like higher commodity prices.
“We cherish a business like this as long-term investors,” says Mr. Brown, whose firm manages about $5 billion and holds a roughly 8 percent stake in Domino’s. He says he still supports Domino’s decision to borrow nearly $1 billion to pay out a special dividend of $13.50 a share last spring, despite the decline that followed.
“I’m not happy about commodity prices, but we’re happy with how Domino’s returned capital to their shareholders,” he said.
Via NYTimes.Com
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If the recent problems of Domino’s Pizza sound a lot like the issues hanging over the broader American economy, it’s no coincidence. With its dependence on consumers, its sensitivity to the run-up in dairy and wheat prices and a risky decision last year to double its debt in order to pay a huge one-time dividend, the pizza chain’s recent troubles speak volumes about the challenges facing both companies and consumers in the year ahead.
But Domino’s trajectory isn’t just another tale of economic gloom and doom. It’s also a story of how large investors — including none other than Michael S. Dell — have kept the faith in the sliding shares of Domino’s, much as they have stuck with the overall stock market despite earnings worries and other fears.
The battle over Domino’s encapsulates the uncertainty facing Wall Street in 2008, with money managers remaining bullish even as veteran strategists like Byron Wien of Pequot Capital Management forecast a recession and a 10 percent drop for the Standard & Poor’s 500-stock index.
So far, at least in the case of Domino’s, the pessimists have the upper hand. Domino’s shares closed Friday at $11.72, down from $20 last summer. And on the first trading day of 2008, Joe Buckley, a Bear Stearns analyst, cut his rating on the entire restaurant group, warning that the combination of higher food and labor costs and slow growth equals a “perfect storm” for the sector.
Mr. Buckley was prescient in getting the Domino’s story right, warning in April that sales could be weaker than Wall Street expected. Since then, he adds, its archrival Pizza Hut has outmaneuvered Domino’s, in part by doing a better job of hedging against soaring prices for cheese, which jumped 42 percent last year.
But there are signs Domino’s is learning how to handle those high commodity prices, Mr. Buckley says. A new contract with cheese suppliers and the ability to more quickly pass on high wheat costs to franchisees might help earnings improve later this year, he says.
With oil hitting $100 a barrel for the first time last week, the ability to manage high commodity prices is a skill other companies will have to master this year.
The parallels with the broader United States economy do not end there. Like more traditional giants, including General Electric and Boeing, one of the few bright spots for Domino’s lately has been international growth. The chain sells distinctly local offerings like the Peppy Paneer in India and the Savoyarde in France, which features potatoes, bacon and crème fraîche.
And, like the broader market — which trades at 14 times 2008 earnings — Domino’s stock is reasonably priced, selling for about 11 times earnings. That is a crucial reason institutional investors do not seem dissuaded by negative news.
In November, the firm that manages the fortune of Mr. Dell and his family, MSD Capital, disclosed that it had acquired a 5.1 percent stake in Domino’s. Mr. Dell’s firm has been an investor for some time, said Lynn M. Liddle, a spokeswoman for Domino’s, but this was the first time its stake rose above 5 percent.
Mr. Dell’s role is hands-off, Ms. Liddle says. “Does Michael Dell come and make pizza? No. I don’t think he speaks to us. His folks do.”
MSD CAPITAL declined to comment on its stake in Domino’s, as did Mr. Dell. But another major holder, Andy Brown of Cedar Rock Capital, remains bullish on Domino’s despite obvious problems like higher commodity prices.
“We cherish a business like this as long-term investors,” says Mr. Brown, whose firm manages about $5 billion and holds a roughly 8 percent stake in Domino’s. He says he still supports Domino’s decision to borrow nearly $1 billion to pay out a special dividend of $13.50 a share last spring, despite the decline that followed.
“I’m not happy about commodity prices, but we’re happy with how Domino’s returned capital to their shareholders,” he said.
Via NYTimes.Com
My Horizontal Life: A Collection of One-Night Stands
What’s Sedona Method Anyway?
How To Get 6 Bottles Of Wine For Free
Newlyweds caught in drag race
Want To Sell Your Wants?
How To Design Your Own T-Shirt Online
posted by UncommonBusiness at 3:46 AM
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