Consumer cyclical

Brokers believe Domino’s has been seriously over-sold

Mon 13 Jun 22, 6:02pm (AEST)
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Key Points

  • Over the last 12 months Domino's share price has fallen -45.28%
  • Morgan Stanley and Citi expect the Domino’s share to be back over $100 within 12 months
  • Morgan Stanley believes growth potential - which implies doubling of the global footprint - is being eclipsed by short-term concerns

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.

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Domino's share price over 12 months.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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