Domino’s Pizza Enterprises Ltd: Cooking up future profits

Domino’s to continue growth path, but is the stock too expensive?

Domino’s Pizza Enterprises Ltd (ASX: DMP) holds the master license for the Domino’s Pizza brand in Australia, New Zealand, France, Belgium, The Netherlands and Japan. The company has a total of 1,290 stores with 610 in Australia/New Zealand, 393 in Europe and 287 in Japan.

The company has had an amazing run over the last five years and this has been reflected in the share price, which has increased by 570%. Earnings per share have increased from 14.8c in FY07 to 40.9c in FY 13. For the first half of FY14, the company saw net profit increase by an impressive 39%, with same-store sales up 4.6%. The company saw substantial corporate cost efficiencies in the half, which resulted in strong margin expansion.

While the Australian and New Zealand market is relatively mature, the company still aims to increase its store count by a third over the next few years. However, where it can really grow is in Europe and Japan. The company has the potential to increase its existing store count in Europe by more than three times to over 1,000 stores in the next 10 years.

The company also recently acquired the Japan business in September 2013 and is off to a good start with same store sales of 7.8% and 21 new stores opened.  TV advertising in Tokyo and Osaka has been a key driver to the early success. The company recently passed Pizza Hut to become number 2 in the Japanese market. Japan presents a huge growth opportunity for the company given the large population and potential for further market penetration.

The Australian online division has proven to be very successful, with online sales now accounting for 60% of all sales. The company has stated that product innovation, new offerings, new store openings and a significant investment in technology will drive further growth in all regions.

Foolish takeaway

Domino’s has been a wonderful performer since listing and the company is set to continue to grow for many years to come, particularly in the European and Japan regions. However, this growth is well and truly factored into the current share price and the stock appears expensive with the shares currently trading on a price earnings ratio of 49. Investors should wait for a pullback before purchasing this quality company.

Investors looking for exposure to the food and beverage sector should look at Coca Cola Amatil (ASX:CCL), which has recently been sold off hard by the market and represents good long-term value at the current price.

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Motley Fool contributor Bradley Murphy owns shares in Coca Cola Amatil.

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