Why this broker thinks investors will be hungry for Domino’s Pizza Enterprises Ltd. in 2018

Credit: Dennis Wilkinson

There are few large cap stocks that divide analysts quite like Domino’s Pizza Enterprises Ltd. (ASX: DMP) and the task of having to put a recommendation on the pizza chain is made all the tougher following the stock’s more than 30% tumble into a bear market over the past 12 months.

Domino’s is one of the worst performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) in 2017.

After a big beating like that, experts need to decide if the stock is looking cheap or if the downtrend will continue. In some respects, a “hold” recommendation is really a cop-out.

Morgan Stanley is one of the brokers willing to stick its neck out. The broker believes this dog is worth buying as worries about the impact of “food aggregators” on Domino’s business are overblown.

Food aggregators include the likes of Uber Eats, Menulog and Deliveroo. These aggregators are enjoying a surge in popularity as consumers are craving greater choice when it comes to home delivered food.

“We think the market has concluded that DMP’s ANZ business has shifted to a ‘mature’ phase given competition from aggregators – and we disagree,” said the broker.

“Online penetration of the Australian takeaway food market is just 10% (vs UK at 34%), or US$47 per capita (vs UK at US$67 and US at US$47), suggesting potential for growth.”

Morgan Stanley is forecasting online penetration to reach 23% by FY25, which implies a compound annual growth rate (CAGR) of 14%.

This impressive CAGR is driven by demographics, a growing trend for consumers to eat at home and households becoming increasingly time poor and comfortable with making online purchases.

There are seven other reasons why Morgan Stanley is bullish on Domino’s. They are:

  1. Domino’s excellent online experience vs. aggregators
  2. Delivery times by Domino’s are about 50% quicker on average
  3. Domino’s margins are better as its delivery system is integrated with its operations
  4. More consistent quality of food delivered by Domino’s
  5. Domino’s greater control over pricing
  6. Domino’s successful expansion into non-pizza categories
  7. Expectations that pizza will remain the favourite type of delivery food

These factors were enough to convince Morgan Stanley to upgrade its price target on the stock to $60 from $53 and to reiterate its “overweight” recommendation on the stock.

Domino’s isn’t the only fast food stock to have suffered in 2017, although I think it has the best chance to make a comeback this year.

Its peers, including Retail Food Group Limited (ASX: RFG) and Collins Foods Ltd (ASX: CKF), have also underperformed the market by a mile in the past 12-months.

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Motley Fool contributor Brendon Lau owns shares of Domino's Pizza Enterprises Limited. The Motley Fool Australia owns shares of and has recommended Retail Food Group Limited. 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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