Why one broker thinks Domino's Pizza Enterprises Ltd. is a buy at current prices

The stock has suffered a big sell-off this year as investors fear it has gone ex-growth. But UBS thinks Domino's Pizza Enterprises Ltd. (ASX:DMP) is starting to look appealing again.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors have lost their appetite for Domino's Pizza Enterprises Ltd. (ASX: DMP) with the stock tumbling into bear market territory since it hit a record high of $76.91 on August 12 last year. The stock continues to be under pressure as it slips a further 1% in early trade to $45.56.

This means the company's market value has crashed by nearly 40% since the high when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up over 8%. A drop of 20% or more is technically referred to as a "bear market".

However, UBS thinks the selloff is overdone and that the stock is starting to look appetising again even though the pizza group's best days (in terms of growth) are probably behind it.

This is one reason for the collapse in the stock. Like-for-like (LFL) sales have been softening after a long period of stellar growth. LFL refers to sales of the same stores that have been opened for a year or more.

The domestic pizza market has reached saturation point and Domino's is fighting off Pizza Hut and other challengers who are aggressively trying to take a bigger bite of the market.

It also doesn't help that Domino's is mired by accusations that its franchisees are underpaying workers and that head office is too lax in monitoring compliance.

UBS took a look at Domino's app download and it suspects that it has lost ground in Australia – the first time in more than two years.

It is also unclear how the company's expansion into Europe is tracking and it is probably too early to say if the EU will give Domino's a much needed growth lever that has the potential to drive sales back to double-digit territory for the group.

The direction of the stock will largely be determined by Europe and UBS thinks the stock is worth backing at these levels as the bad news from ANZ is largely priced in

"DMP's ability to transfer its leading ANZ model to EU is a material opportunity in our view given the significant earnings potential over the next 5-10 years," said the broker.

"In our view, further signs of green-shoots in EU and/or resolution of sentiment issues in ANZ will be the two key catalysts for multiple re-rates."

The broker has a "buy" recommendation on the stock with a 12-month price target of $60.

I think it's too early to bet on Domino's as there's still not enough clarity on the outlook for the stock, particularly given that the stock is trading on a price-earnings multiple that is close to 30 times for the current financial year.

It's a little too rich for my stomach as this leaves the stock vulnerable to a further de-rating in the short term if management continues to disappoint.

The good news is that there are other growth stocks that are worth looking at for 2018.

The experts at the Motley Fool have three that make the cut and you can claim your free copy of the report by clicking on the link below.

Motley Fool contributor Brendon Lau has no position in any of the 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »