The Domino's Pizza Enterprises Ltd (ASX: DMP) share price has fallen by 17% so far in 2017. Is it a buy?
Domino's is the franchisor of Domino's outlets in Australia, New Zealand, Germany, France, Japan, Netherlands and Belgium. It has been one of the best performing shares on the ASX over the last ten years.
Domino's shares are trading quite expensively at 39x FY17's estimated earnings, even though the share price has fallen quite heavily. Here is my bull and bear case for the share price:
Bull case
Domino's is still rapidly growing its business. For the six months to 31 December 2016 it reported that group same store sales (SSS) had increased by 9.4% and that earnings per share had increased by 28.6%. This was a great result for a business that has already been around for quite a while.
The business could have more impressive results in the oven as it grows in other countries like Japan and Germany, which are much bigger than Australia and have much larger potential.
The technology that Domino's has incorporated into its service has worked very well so far. It's hard to imagine what else Domino's could do, but I'm sure they are cooking up something.
Bear case
The price/earnings ratio is quite high, even with the tremendous growth that Domino's is experiencing. It would be quite easy for the market to lower the value of the company and it would still be classed as expensive.
Pizza Hut and Retail Food Group Limited (ASX: RFG) are going to do everything they can to reign in Domino's. So far they have been unsuccessful, but at some point that may change. Just look at how the tables are turning between Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES).
Domino's is yet to release the results of its industrial relations compliance program which my fellow Fool writer Owen Raszkiewicz covered here. There were allegations that Domino's franchisee employees were not being paid correctly. This is a cloud hanging over Domino's until the issue has been resolved.
Foolish takeaway
Domino's has a bright future over the next ten years as it seeks to grow its number of outlets from 2,048 stores at December 2016 to 4,650 stores by 2025.
However, it's important to not pay too high of a price for the shares. After the results of the audit are known I would be happy to buy shares in Domino's and hold for the long-term. But for now, I'd rather keep Domino's on my watchlist.
