Domino's Pizza (DPZ) is set to release its Q1 earnings on April 27 before the market opens. DPZ stock could be cheap based on its strong free cash flow. Moreover, shorting 6% lower puts yield 1.7% for the next three 3 weeks.
DPZ closed at $372.39 yesterday, up 1.77%, and is up from a recent low of $347 on March 27. It could be worth significantly more, especially if its free cash flow (FCF) and FCF margins stay strong in Q1.
What To Look For in Q1 Earnings
I discussed Domino's valuation after it released last quarter's earnings in a February 23 Barchart article. Domino's made a 13.6% free cash flow (FCF) margin in 2025, but its Q4 margin dipped to 11.5%.
Based on that, if Domino's Q1 FCF margin comes in around 13% or higher, analysts may be willing to raise their price targets.
For example, analysts are forecasting $1.13 billion in revenue this quarter and $5.27 billion for 2026. And for 2027, the forecast is $5.48 billion. That sets the next 12 months (NTM) forecast is $5.375 billion.
As a result, using a 13.6% FCF margin over the next 12 months, FCF could hit $731 million.
Using a 5% FCF yield metric (i.e., assuming 100% of FCF is paid out, the market value could rise to $14.62 billion:
$731m / 0.05 = $14.62 billion
That is over $2 billion higher than its existing market cap of $12.52 billion, according to Yahoo! Finance (i.e., +16.77%). So, the DPZ price target is:
$372.39 x 1.1677 = $434.84 price target
But, again, all of this depends on how strong its Q1 FCF margin comes in. If it is significantly lower, the DPZ price target may have to be downgraded.
One way to play it, in case DPZ does not do well, is to sell short out-of-the-money (OTM) puts.
Shorting OTM DPZ Puts
For example, the May 15 expiry $350 strike price put option contract has a $5.95 midpoint premium. This strike price is 6% below Thursday's close.
However, it provides an attractive 1.70% yield (i.e., $5.95/$350.00) play for a short-seller of this put contract.
This means that an investor who secures $35,000 with their brokerage firm can enter an order to “Sell to Open” 1 put at $350 expiring May 15. The account will then receive $595.00:
$595/$35,000 = 1.70%
The idea is that the investor is willing to pay $350 to buy 100 shares of DPZ. If the stock falls to this point on or before expiry, the collateral will be assigned to buy 100 shares.
However, there is only about a 25% chance this will occur, based on the delta ratio. In addition, the breakeven point, if that happens, is actually lower:
$350 - $5.95 = $344.05, or -7.6% below today's price
The bottom line is that DPZ stock looks undervalued ahead of earnings. One way to play it is to short OTM puts in near-term expiry periods.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
More news from Barchart
- Unusual Put Activity Is Flagging a Smart Trade Setup in This New Quantum Computing Stock
- Domino's Pizza Stock Could Be Cheap Ahead of Earnings Next Week
- 17 Unusually Active Call Options: Buy 3 for Under $300 and Big Potential Profits
- Is Walmart Stock in a Bubble? 1 Weird Signal Answers a Contrarian ‘No.’
