Domino's Pizza Enterprises Ltd: Is this stock's 530% gain just the starter?

Domino's Pizza Enterprises Ltd. (ASX:DMP) has been a top performer and that track record looks set to continue.

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If you bought Domino's Pizza Enterprises Ltd. (ASX: DMP) five years ago then you're sitting on a share price gain of a staggering 530%! Not bad at all for investing in a pizza joint!

What's more, you didn't have to take enormous risk – you just had to buy a market leading, high quality, well-managed company and hold on to it through the daily ups and downs of the market.

So why has Domino's been so successful?

That's a big question but at least part of the answer lies in management's ability – which is top notch by the way – to innovate along with both its domestic and international growth opportunities.

In fact in many ways it's the innovation which is driving the growth – a pretty amazing feat for a pizza chain, but how else do you explain the company's ability to thrive in such a competitive market as the pizza restaurant segment?

This innovation coupled with the firm's expanding master franchises which now incorporate European countries and Japan provides the group with a long runway of growth opportunities. Compared with a business such as Collins Foods Ltd (ASX: CKF), which owns KFC and Sizzler brands the growth potential is stark.

But what about price?

The problem with Domino's has always been the market price. Investors have, for a long time, been well aware of the growth rates being achieved by the pizza maker and of its future growth potential.

Normalised earnings per share have grown from 30 cents per share in 2011 to 54 cents per share in 2014 and are forecast to grow to over 90 cps by 2017. This fast growth has led to the shares trading on a hefty price-to-earnings multiple. It's certainly right to be cautious about paying lofty multiples, however in the case of Domino's it is arguably justified.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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