Why Domino’s Pizza Enterprises Ltd hyper growth could continue

Credit: Dominos

If you gave me $50,000 and a time machine that went back to June 2006 I would invest all of this money in Domino’s Pizza Enterprises Ltd. (ASX: DMP) shares.

In the last 10 years, Domino’s Pizza has been one of the most outstanding shares on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), providing its investors with an average annual total shareholder return of 38.2%.

This means that a $50,000 investment in the company 10 years ago would now be worth just under $1.3 million. This is a staggering return on investment of 2,441%.

Whilst I don’t necessarily believe that Domino’s Pizza shares are likely to produce this level of return again over the next decade, I do think there is a lot more left in the tank of this growth machine.

The company’s aggressive expansion has been the key to this strong performance and is what attracts me to the company today. As of its half-year results, the company had a total of 1,580 stores globally, up from 1,422 at the same point in FY 2015 and 1,290 in FY 2014.

The good news is that this level of expansion looks set to continue. According to management, the company plans to reach 4,250 stores globally by 2025. This year it expects to open between 460 and 500 new stores, thanks partly to its acquisition of Pizza Sprint in France and its joint venture with UK-based Domino’s Pizza Group plc to acquire Joey’s Pizza in Germany.

I’m very optimistic about these acquisitions. By the end of the year these stores should all be converted into Domino’s stores, which management believes will allow it to increase their market exposure and sales through its marketing efforts.

Elsewhere, its Japan segment continues to be one of its star performers posting half-year revenue growth of 35% year-on-year. I believe this strong performance can continue, especially that considering by the end of 2016 it expects to have added at least 68 more stores taking it beyond 500 stores in the country.

Domino’s will also get an added bonus from a weaker Australian dollar versus the Japanese yen. It has weakened by 16% in the last 12 months, which is great for the company considering 47% of its total sales currently derive from the country.

According to the brokerage arm of the Commonwealth Bank of Australia (ASX: CBA), analysts are expecting Domino’s to grow its earnings by 34% per annum for the next couple of years at least. So although the shares are changing hands at 67x estimated FY 2016 earnings, I believe the potential growth that lies ahead does justify paying a premium.

There are of course dangers with investing in growth shares. Should Domino’s fail to live up to the lofty growth expectations that the market has, then it is likely the share price could tumble. Thankfully I believe Domino’s is positioned well, has a strong brand, utilises technology brilliantly, and has macro advantages that should help it deliver on expectations. In light of this, I believe Domino’s is a great investment and a far better option than industry peer Collins Foods Ltd (ASX: CKF).

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.  I contribute to The Motley Fool as a freelance writer and the thoughts and opinions in this post are my own, not that of The Motley Fool’s.

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