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.
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