Should you be overweight Domino’s Pizza Enterprises Ltd?

Credit: Dennis Wilkinson

Shares in pizza phenomenon Domino’s Pizza Enterprises Ltd (ASX: DMP) are likely to enjoy a strong week after the fast food chain upgraded its profit guidance for financial year 2017 on the back of strong same-store sales growth partly driven by increased online ordering.

The group now expects earnings growth to be greater than 30% this financial year with same store sales in the Australia and New Zealand region expected to be up an impressive 12%-14% over the prior year.

These kind of growth rates are usually reserved for the hottest technology stocks not pizza merchants, with Domino’s still thumping the competition in the Australia market, while the growth recipe is also delivering strong same-store sales growth in its new markets of France and Germany. The European markets also have the potential for gross profit margin expansion, which could help drive profits higher at double-digit rates for several years yet.

Driving the sales growth is the ability of the company to constantly reinvent its menu, mobile ordering, and other digital innovations that are helping it steal market share and thrash the competition. The only weak spot is the forecast for flat same-store sales growth in Japan, which is a market that has proven a relatively tough nut to crack.

One potential threat is the ability of the digital takeaway aggregators such as Delivery Hero, Menulog and Deliveroo to level the playing field, although as yet their popularity, promotional activity and discounting does not appear to be slowing the Domino’s juggernaut.


The other big problem for investors is the nosebleed valuation with the stock at $69 selling for around 50x analysts’ estimates for $1.39 in earnings per share over FY17. This looks expensive and the company will need to deliver on its European ambitions to justify the price tag even after factoring in today’s profit upgrade.

For fast food fans I would prefer the belt busting potential of pizza, cake and donut business Retail Food Group Limited (ASX: RFG). It also has ambitious overseas expansion plans and a far more appetising valuation around just 17x trailing earnings with forecasts for 20% profit growth this financial year. Just today the AAP reported that the group’s CEO is intent on ramping up the overseas expansion to build a network of more than 3,500 food outlets worldwide.

How 1 Man Made 100x His Money After 50

Few know, that as Warren Buffett blew out the candles on his 50th birthday cake, he had just 1% of his current fortune. Think about it: At an age when most give up hope, Buffett was just getting started on the remaining 99% of his fortune. Goes to show you that it's never too late for you to potentially get rich. Which is why we've gathered the strategies we learned from Buffett, distilled them down to 11 simple lessons, and put it in an exclusive report for you to claim. Just click here to learn more about this handy investing guide.

Motley Fool contributor Tom Richardson owns shares in Retail Food Group. The Motley Fool owns shares in Retail Food Group.

You can find him on Twitter @tommyr345

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.