While most restaurants are making money again, with consumer confidence below 80, it is very tough to post significant same-store sales growth - either through pricing or traffic. The industry has taken a hit over the last several years as discretionary spending has tightened and the customer focuses on value opportunities.

Within the restaurant industry, the pizza industry stands out as weathering the storm better than most - both through margin stability and sales consistency. The domestic Pizza industry is dominated by three companies: Dominos, Pizza Hut and Papa Johns. Market shares of each are approximately 18%, 14% and 6% domestically, based on third-party market research. Not only does Domino's have a larger market share, but they do it with less restaurants - 3,000 less restaurants. Dominos has approximately 4,500 domestic stores nationwide, while Pizza Hut has 7,500 stores.

Having opened the first store in 1960 in Ypsilanti, Michigan, Dominos has grown into the largest Pizza chain in the world, with 9,000 stores worldwide. Domino's posted revenues for the last twelve months in Q3 2010 of approximately $1.4 billion and EBITDA of +$200 million, with $20 million of maintenance capital expenditures.

From 2005 to Q3 2010 Dominos domestic sales have declined slightly from roughly $560 million to $520 million while operating income has increased from $148 million (26%) to $175 million (33%). In retrospect, International sales have increased from $130 million to $168 million and operating margins have increased from $37 million (28%) to $92 million (55%) - very impressive numbers through the Great Recession. In all, Dominos has increased margins over the last 5 years while keeping total revenues flat - a sign of good management and a stable business.

Probably the biggest attraction of Domino's is their Franchise Fee. Each year $160 million is paid to Domino's from franchisees who are charged a royalty for using the IP and other items of Domino's. Typically, in order for the company to sustain this $160 million, it will likely cost them $40 million (~25%) a year. In a sense, Domino's is receiving a "rent check" which increases with inflation and new franchisees for the next 10 years (likely uninterrupted) of at least $120 million. What does NOI on rental properties or a good Insurance business go for - 10x? If invested properly at their own internal rates of return on corporate stores, these dollars should produce new earnings for the Company in 2012 and 2013.

In addition to Company-owned and Franchise-owned stores, Domino's makes consistent money selling products to its Franchisees of $865 million with operating profit of $87 million (10%). While not a high margin business, it has consistently increased over the last several years rising from around $55 million in 2006. We expect these earnings to be stable to rising through 2012 and 2013.

In general, we expect the Company to achieve overall higher revenues and operating margins going into 2012 and 2013 with new revenues from the international segment - which in turn will increase their current operating margin from the mid-teens.

But the investor of today makes no money on the past - only the future. Fortunately, we have reason to believe growth and stability in the pizza industry and for Domino's will continue. In the past several weeks the Company has opened new stores in India and Bulgaria. Pizza Hut has had great success in these emerging markets and others, and there leaves much room for expansion for a second player with the means.

In addition to growth, multiple expansion and a possible buyout (all three longer-term catalysts), in the short-term the Company will announce a refinancing of their bonds. While the current financing (@ 5.9%) is very attractive, we believe the overhang in the equity is high given the markets lack of understanding of how a royalty stream securitization works. Our confidence in the business allows us to appreciate the more complicated, but less expensive capital structure.

Normally, we are more picky with our multiples, preferring to purchase at yields in the +15% range, but sometimes these requirements blind us to the easy money - like DPZ.

In summary, what would you pay for a Company where EBIT margins are 15% and rising, Comps rising at +10% over last year, and stores are being opened with new franchisees in India, China and faster growth economies? 15x EBIT? 2x Sales? 7% free cash flow yields? What do McDonalds and YUM trade at (3.7x and 2.1x EV/Sales, respectively)? Should "burgers" get an outrageously higher multiple than "pizza"? Is Dominos so different? Papa Johns has EBIT margins of 7.2% with single digit comp growth over last year and it still trades at +10x EBIT.