Does Domino’s share price make for an attractive entry point?

Domino’s Pizzas (ASX: DMP) disappointing full year FY22 miss, announced earlier this week, did little to staunch the progressive share price descent from over $165 in September 2021 to a two-year low of $63.62 yesterday.

To quickly recap, Australia’s largest pizza chain saw FY22 net profit fall -14% to $158.7m on revenue of $2.289bn, up 4.1% in the year ended June 30.

Earnings (EBIT) fell -10.5% to $263m, and Domino’s slashed its final dividend -20% to 68.1 (payable on September 15).

Much of Domino’s troubles can be attributed to Europe where the pizza chain struggled to pass on higher-than-normal inflation costs.

Turning point

But while rising raw material costs – notably cheese - ate into the pizza chain’s profits, brokers believe the last result signalled a largely overlooked turning point.

If the views of the seven brokers covering Domino’s (as reported on by FN Arena) are any proxy, the target price of $84.32, makes for an attractive entry point with 27.5% upside.

Lower pricing pressure & store expansion

Embedded within Domino’s FY22 result was management’s reassurance that price pressures for key ingredients such as wheat and cheese appear to be flattening.

Combatting inflation, added management, also means a lift in some product prices.

Pricing aside, the company is placing a lot of upside in its Asian expansion.

While the chain has acquired 287 stores in Malaysia, Singapore and Cambodia for $214m - the biggest acquisition in the company’s history – there are plans to have 600 stores in total across these three countries.

The three businesses achieved network sales of $178m in the year to June, plus earnings (EBITDA) of $21m.

This is expected to increase earnings per share (EPS) by 5% in 2023 (excluding costs but including cost savings).

Earnings improvement

The Moderate buy consensus on Domino’s suggests that true believers in the stock are quick to look beyond shorter-term hiccups embedded in the last result.

Based on Morningstar’s fair value of $84.22 the stock appears to be significantly undervalued.

Morningstar’s valuation on Domino’s is largely endorsed by leading brokers, with analysts now expecting earnings to improve and margins to rise with relief from commodity price inflation emerging.

Morgans expects earnings (EBIT) to improve from now, and forecasts 12.9% growth in FY23, followed by 19.5% growth in FY24 (Add rating and target price of $90.00).

Citi is encouraged by management targeting same-store sales growth of 3-6% for FY23, with a possible tailwind from the FIFA World Cup and lower year-on-year comparisons. (Buy rating and target of $84.40).

With both Australia/NZ and Japan managing inflation better than expected, and with the approach now being implemented in Europe, UBS maintains a Buy rating, with the target price decreasing to $85.00 from $90.00.

Morgan Stanley anticipates same-store sales growth in the coming year to be within the company's provided 3-6% range, and retains an Overweight rating, while the target price decreases to $95.00 from $100.00.

Domino's share price over 12 months.