Brokers believe Domino’s has been seriously over-sold

One-time market darling Domino’s PIZZA Enterprises (ASX: DMP) no longer commands the investor gravitas its once took for granted when trading at over $160 a share mid-September 2021.

Over the last 12 months the share price has fallen -45.28%, and year-to-date the share price has virtually halved from $118.03 to $62.41.

But following the pizza leviathan’s protracted sell-off, brokers’ now believe the company has been left significantly over-sold.

Based on the seven brokers that cover the stock (as reported on by FN Arena), Domino’s is currently trading with 49% upside to the price target of $92.96.

Consensus on Domino’s is Moderate Buy and based on Morningstar’s fair value of $86.23 the stock appear to be undervalued.

Look beyond short-term pain

Both Morgan Stanley and Citi expect the Domino’s share to be back over $100 within 12 months.

Despite greater short-to-medium-term costs and challenges than were previously flagged by management – including inflation, conflict in Europe, and currency movements – Citi is attracted to the company’s long-term store rollout opportunities.

Echoing similar sentiment, Morgan Stanley also believes growth potential - which implies doubling of the global footprint - is being eclipsed by short-term concerns about receding from the lockdown boost and current food inflation.

Fortress Asia

Given the recent de-rating of the stock, Ord Minnett has upgraded Domino’s to Buy from Accumulate (target $99).

The broker is putting a lot of faith in the group’s continued Asia strategy with a target for net store growth of 9-12% per annum.

Ord Minnett notes while advertising in Japan is considerably higher - and management does not expect this to fall to Australian levels - as scale builds, margin should expand as a proportion of network sales.

Doubling down on Japan

Intelligent Investor is also attracted to the group’s doubling down on its successful fortressing strategy in Japan and Taiwan.

After a year of flat-lining sales and profits in Japan, the group’s reset strategy appears to be working.

The shift to a barbell pricing strategy, comprising both large expensive meals and smaller cheaper options, appears to have led to immediate improvements with network sales increasing by 15% in the 2019 and profits by 54%.

A boost in smaller, more frequent meals during covid saw network sales jump 26% in FY20 and 31% in FY21, while profits grew 40% during both years.

Back on track

While quarterly sales took a dip, following the lifting of the country’s fourth state of emergency in October last year – which saw the Japanese revert to their old ways – management within a recent presentation on Asia noted that there has been progress.

Management reiterated their commitment to the barbell pricing strategy, and expects higher volumes, and lower run times to keep a lid on inflation.

Within the latest update, management also confirmed a target of doubling the current store count to 6,650 stores before 2033.

Intelligent Investor expects this to translate into double-digit earnings growth over the next 5-10 years. The broker expects a recovery to around $2.30 in 2023, putting the stock on a forward PER of around 28.

“That’s attractive for such a high-quality business with excellent long-term growth prospects.”

The fund manager suggests buying below $85, and selling above $150.

Domino's share price over 12 months.