Is Domino’s Pizza Enterprises Ltd headed above $70 a share?

Credit: Dennis Wilkinson

What: Domino’s Pizza Enterprises Ltd (ASX: DMP) shares climbed 3.4% higher on Thursday to close at $66.73. The stock has now reversed much of the pizza store franchisor’s losses over the previous two days and it is back to within striking distance of its all-time high of $70.82 set back in May.

So What: As was reported here on Tuesday, Domino’s share price took a hit – falling from over $69 to close near $67 – after a leading broker questioned the effect on profitability if Domino’s was forced to raise employee wages.

Domino’s CEO Mr Don Meij was quick off the mark on Tuesday to issue a response to the Deutsche Bank analyst’s report, releasing an ASX announcement which noted that the group had been in negotiations with the Shop, Distributive and Allied Employees’ Association (SDA) for the past 12 months in an attempt to deliver a new enterprise agreement.

Despite Domino’s attempt to put investor concerns at ease, the selling continued into Wednesday with the shares closing that day’s trading session at just $64.55.

Now What: There’s no question that the market is expecting strong growth from Domino’s with analyst consensus forecasting a rise in earnings per share from 73 cents per share (cps) in financial year (FY) 2015 to 100 cps and 135 cps in FY 2016 and FY 2017 respectively. (source: Reuters)

That’s certainly an exciting growth rate and deserving of an above market-average multiple. However, based on the FY 2017 forecast, Domino’s is trading on a forecast price-to-earnings ratio of 49 times. That’s a heady price to pay and suggests that the stock is priced for perfection.

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Motley Fool contributor Tim McArthur 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.

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