What Happened? Shares in Domino's Pizza Enterprises Ltd. (ASX: DMP) surged over 7% on Tuesday morning, taking the company's two-day gain to nearly 11% and year-to-date gain to over 60%!
Why? No ASX announcements have been made by the company but various news outlets, including The Wall Street Journal, have reported that Domino's plans on letting customers track the progress of their pizza order on their smartphone, as delivery drivers will now be monitored with GPS tracking.
Details of the reported plan include a rollout in Australia and New Zealand by the end of July, and extension to franchises in Japan, France and the Netherlands by the end of next year.
What Now? I agree with my colleague Tom Richardson's comments yesterday that "the business is now selling for around 53x analysts' estimates for earnings per share this financial year. That looks expensive, especially if Domino's domestic competition (Pizza Hut, Hell Pizza, Crust Gourmet Pizza, Pizza Capers and Eagle Boys) is ever able to catch up on it. The Domino's story is attractive, but the stock looks at a very frothy top."
Now, I'm not a huge consumer of Domino's pizzas so perhaps I'm not the best to speculate on this, but I feel that an 11% increase in the share price as a result of GPS tracked delivery seems a little over-the-top. Do investors really believe that GPS tracking availability makes Domino's worth 11% more as a company?
The stock has also been subject to broker upgrades in the past and this may also be having an influence on today's price action.
There's no question that Domino's is an extremely successful company with quality management and a great strategy, but unless GPS tracking will significantly boost profitability I believe there are better value options available.
