Rising input costs & plunging yen to staunch Domino’s earnings estimates: Macquarie

With Japanese earnings likely to be hit by the plummeting value of the yen, Macquarie has significantly trimmed its earnings estimates for Domino’s Pizza (ASX: DMP) for FY23.

As a result, the broker’s target price on the global pizza giant has been cut to $63.30 from $74.90, but still represents a 9% upside to the current price.

Macquarie, which remains Neutral rated on Domino’s, is also concerned that slowing web traffic in key markets suggests some easing of demand for pizza.

Web traffic in Japan fell 29% month-on-month in September (MoM) and Macquarie expects a further the step-down in sales with customers continually re-evaluating their dining options now that covid restrictions have been lifted.

Inflationary pressures

With easing pizza demand coinciding with the rising costs of cheese, wheat, meat and cardboard packaging in key markets, plus wage increases, Macquarie expects to see a corresponding hit to Domino's earnings and franchisee profitability.

Due to a 5% increase in wages and a 10% jump in the cost of goods sold (COGS), the broker expects franchisee earnings margins to fall to 8.6% from around 13.5%.

Macquarie also reminded investors that while earnings margins remain within an acceptable 8%-12% range, the impact at the franchisee level would definitely be noticed.

Falling estimates

While Macquarie’s earnings estimate for FY23 is expected to fall by -10.5% in FY23, the broker is forecasting a 3.4% gain in FY24 and 0.4% improvement in FY25 on the back of marking to spot its A$ versus yen forecasts for FY23.

“We remain cautious on the outlook for consumers into 2023 as the effects of rising inflation and interest rates place pressure on household budgets,” Macquarie noted within a recent update to clients.

“We are excited by DMP’s new markets in Asia, but we believe near-term profitability in Europe is likely to act as a drag on the group in FY23.”

Macquarie forecasts a full year FY23 dividend of 160.30 cents and EPS of 186.90 cents.

What other brokers think

Domino’s share price is down -55% over 12 months.

Consensus on Domino’s is Moderate Buy.

Based on Morningstar’s fair value of $81.07 the stock appears to be undervalued.

Based on valuation, Goldman Sachs recently upgraded Domino’s to Neutral from Sell, and notes that since the Sell rating, the stock is -12% versus ASX/200 5%.

Goldmans’ has upgraded its FY23-FY25 NPAT estimates by 1.3%-8.1% on the back of moderating cost inflation.

The broker’s price target of $62.90 implies FY24 P/E of 27.4 versus historical average of 29.0.

Based on the six brokers that cover Domino’s – plus Macquarie - (as reported on by FN Arena) the stock is currently trading with 40.07% upside to the target price of $82.66.

Morgan Stanley, (Overweight) has the highest price target of $95.00 (25/08/22) and anticipates same store sales growth in the coming year, within the company's 3-6% range. 

The broker is also encouraged by acquisitions within three new markets, Singapore, Malaysia and Cambodia.

Domino's Pizza Enterprises share price was down -2.36% an hour out from the close.