Papa John’s Stock Looks Like Better Bet Than Domino’s

Domino’s Pizza, Inc. (DPZ) is trading lower by 1% in Thursday’s pre-market after beating first quarter 2020 profit estimates by a wide margin. In-line revenues rose 4.5% year over year, while U.S. same-store sales gained 1.6% in the quarter, which is positive but unspectacular given a nationwide shutdown that has prompted consumers to order more takeout and delivery. Overseas sales matched domestic results, posting a paltry 1.5% gain.

The company originally reported sales numbers at the end of March, triggering a two-day slide because it failed to match robust first quarter and fourth quarter 2019 results. Domino’s blamed the shortfall on shelter-in-place directives, event cancellations, pantry loading of frozen products, and college closures, even though rivals that include Papa John’s International, Inc. (PZZA) have posted healthy first quarter metrics. Yum! Brands, Inc.’s (YUM) Pizza Hut added to that bullish theme last month, announcing that it would hire 30,000 new employees to meet increased demand.

Domino’s stock rallied to an all-time high ahead of the news, stretching six points above the February 2020 peak at $381.86. It turned tail in reaction to the release and is now trading below that level, raising the potential for a failed breakout and intermediate decline. Even so, pizza sales will be big business throughout 2020, and the reopening of shuttered restaurants could attract fresh buying interest in the second quarter.

Domino’s Pizza stock broke out above the 2007 high at $19.97 in 2011 and entered a strong uptrend that posted a long series of higher highs and higher lows into the August 2018 peak at $305. The stock stumbled for the next year, grinding lower in a shallow correction that finally ended at an 18-month low just above $220. It returned to range resistance in December and broke out in February, posting a one-day wonder rally that featured a 68-point gap.

It filled the gap during the sell-off into March and turned higher, completing a V-shaped recovery into the prior high just ahead of this week’s news. The outcome of this two-sided tape will need to wait for Thursday’s regular session, in which odds for higher or lower prices are equally divided. Sidelined investors hoping for a pullback should watch the $350 level, which generated a small-scale inverse head and shoulders breakout on April 13.

Papa John’s stock has benefited greatly from the pandemic, which has finally taken the spotlight off the long-running scandal prompted by the untimely departure of former CEO and chair John Schnatter. The stock posted an all-time high just above $90 in December 2016 and turned lower, with losses accelerating in July 2018 when Schnatter stepped down as chair. The decline bottomed out in the upper $30s a month later, ahead of support tests in February and June 2019.

The subsequent advance ended at the .618 Fibonacci sell-off retracement level in February 2020, yielding a vertical downdraft that broke support in March before hitting a seven-year low in the $20s. The subsequent recovery unfolded at a similar trajectory, completing a V-shaped advance into the prior high. It nosed to a two-year high at $72.93 on Wednesday but closed under the prior peak and is trading lower on Thursday morning.

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high in July 2015, more than a year before the price peak, and entered a distribution wave that ended at a 15-year low in August 2018. OBV then eased into a strong accumulation phase, reaching the 2015 high in February. This marks a strongly bullish divergence with price, raising the odds that shares of the fast food chain will eventually reach the all-time high posted more than three years ago.

The Bottom Line

Domino’s Pizza disappointed investors with mediocre first quarter results even though rivals are reporting robust sales.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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