Morgan Stanley thinks robots can repower the Domino’s Pizza Enterprises Ltd. share price

Credit: Seth Werkheiser

The underperforming Domino’s Pizza Enterprises Ltd. (ASX: DMP) is struggling to make new friends as experts are divided on the outlook for the embattled pizza chain franchisor.

Franchisors are a dirty word right now as their franchisees stand accused of underpaying staff. You only need to look at the high-profile cases involving not only Domino’s, but Caltex Australia Limited (ASX: CTX) and Retail Food Group Limited (ASX: RFG) to understand the negative sentiment.

However, robots of the not-too-distant future could be the redeemer of Domino’s as they are 1 of the 10 reasons Morgan Stanley has decided to support its “overweight” call on the stock.

The broker visited Domino’s European business and has witnessed the company’s robotic delivery unit, which has a very unsexy name of DRU, in action.

The DRU has made around 1,000 deliveries from two German stores. These robots deliver pizzas up to 750 meters away from the stores with an employee following behind to supervise the trials.

Eventually, the robots will be monitored from a central base and the expected uplift in productivity is significant as the DRU deliveries are 9 minutes quicker on average.

What’s more, Germany represents Domino’s best long-term growth opportunity in Europe even as it faces a few lean years in FY18 and FY19.

Another reason why Morgan Stanley is hot for Domino’s is because the company’s German and French businesses are approaching a critical tipping point. When store count in both these countries reaches over 500, management will be able to fully leverage its returns from advertising, which in turn will drive same store sales (SSS) growth.

The broker has also played down the risk of Domino’s missing its FY18 guidance of 20% net profit growth. The market is sceptical that the company can hit this target but Morgan Stanley thinks it’s achievable as its European results are expected to improve in the current half year.

Further, the threat of aggregators like UberEats and Deliveroo may be overstated if the experience in the Netherlands is any guide.

“The Netherlands is probably the most penetrated country for online takeaway food in the world. DMP success in this market (5 years of double digit SSS growth) indicates it can thrive with aggregators,” said Morgan Stanley.

The broker has a price target of $55 on the stock.

But Domino’s isn’t the only stock on the ASX that is leveraged to robots and artificial intelligence. There are stocks that are probably better placed to benefit from the rise of the machines!

The experts at the Motley Fool have produced a free report on the sector and the stocks that are best positioned to profit from this thematic.

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Motley Fool contributor Brendon Lau owns shares of Caltex Australia Ltd. 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 Scott Phillips.

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