Key Insights

Domino's Pizza's estimated fair value is US$509 based on 2 Stage Free Cash Flow to Equity With US$498 share price, Domino's Pizza appears to be trading close to its estimated fair value The US$509 analyst price target for DPZis comparable to our estimate of fair value.

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Domino's Pizza, Inc. (NASDAQ:DPZ) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Our free stock report includes 3 warning signs investors should be aware of before investing in Domino's Pizza. Read for free now.

The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions)  US$641.5m US$700.8m US$851.9m US$941.6m US$1.02b US$1.09b US$1.14b US$1.20b US$1.25b US$1.29b Growth Rate Estimate Source Analyst x5 Analyst x5 Analyst x2 Est @ 10.53% Est @ 8.19% Est @ 6.56% Est @ 5.42% Est @ 4.62% Est @ 4.06% Est @ 3.66% Present Value ($, Millions) Discounted @ 8.2%  US$593 US$598 US$672 US$687 US$686 US$676 US$658 US$636 US$612 US$586

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$6.4b

Story Continues

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 8.2%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$1.3b× (1 + 2.8%) ÷ (8.2%– 2.8%) = US$24b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$24b÷ ( 1 + 8.2%)10= US$11b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$17b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$498, the company appears about fair value at a 2.2% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.NasdaqGS:DPZ Discounted Cash Flow May 20th 2025

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Domino's Pizza as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.2%, which is based on a levered beta of 1.263. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Check out our latest analysis for Domino's Pizza

SWOT Analysis for Domino's Pizza

Strength

Earnings growth over the past year exceeded the industry.

Debt is well covered by earnings.

Dividends are covered by earnings and cash flows.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Hospitality market.

Opportunity

Annual earnings are forecast to grow for the next 3 years.

Current share price is below our estimate of fair value.

Threat

Debt is not well covered by operating cash flow.

Total liabilities exceed total assets, which raises the risk of financial distress.

Annual earnings are forecast to grow slower than the American market.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Domino's Pizza, we've put together three important items you should consider:

Risks: Every company has them, and we've spotted  3 warning signs for Domino's Pizza  (of which 2 are a bit unpleasant!) you should know about. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for DPZ's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.