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Domino’s Pizza Enterprises Ltd. keeps making the dough: But is it too expensive?

pizza

Domino’s Pizza Enterprises Ltd. (ASX: DMP) delivered another brilliant year for shareholders with net profit up more than 50% on the prior year to $45.8 million. A final fully franked dividend of 19 cents per share was declared, taking the full year total to 36.7 cents and placing the stock on a yield of 1.58% when selling for $23.26.

Same-store sales growth in its core Australia and New Zealand market was 6.3%, but investors are looking east to the mega-market of Japan for the new chapter in an impressive growth story. Some financial analysts thought the Japanese consumer market with different dietary inclinations may prove a bridge too far in developing the story. However, it appears the allure of well marketed and cheap pizza has proven irresistible even in Japan, with earnings there up 70% on the prior corresponding period and now contributing almost one the group’s total.

So with Domino’s smashing through 52-week highs with more regularity than some get through the pizzas, is it to time to buy, or might there be some chinks in the armour?

Well the current valuation is certainly fruity, selling for $23.26 Domino’s trades on 46 times earnings, meaning today’s buyers are expecting it to gobble up the Japanese market and keep delivering strong same store sales growth in Australia.

While the overall key to Domino’s success appears to be its ability to make a profit while selling its pizzas far cheaper than competitors. If a low-cost competitor were able to steal market share then Domino’s may feel the heat, otherwise with a seemingly top-notch management team delivering on strategy and execution it could justify today’s valuation.

However, paying too much for fast-growing companies is one of the commonest investing mistakes to avoid and buyer’s at today prices may find slim pickings in future returns. Personally, I would not be chasing Domino’s at these valuations, although the growth story remains positive, it may find the domestic market gets increasingly crowded.

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Returns as of 6th October 2020

Motley Fool contributor Tom Richardson has no financial interest in any company mentioned. You can find him on Twitter @tommyr345

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