Earlier today I revealed that Domino's Pizza Enterprises Limited (ASX: DMP) was now the second-most shorted share on the Australian share market with short interest of 17%.
Short sellers have been piling into the pizza chain operator en masse since it delivered a weaker-than-expected first-half result last month.
It appears as though they are sceptical that the company will be able to achieve its lofty full-year guidance after the poor half.
But one broker that seems to be confident in Domino's and its future performance is UBS. According to a note out of the broker, it has retained its buy rating and $57.50 price target on the company's shares. This price target implies potential upside of 32% over the next 12 months.
UBS believes that the disruption to its business caused by food takeaway aggregators has been overplayed and that their threat has been more than priced into Domino's shares.
Despite their emergence, the broker remains confident that ANZ sales can continue growing at an above-average rate over the next few years at least.
In light of this, UBS has forecast Domino's delivering earnings per share of 156.5 cents in FY 2018 before rising to 196.1 cents in FY 2019. This will mean year-on-year growth of approximately 35% and 23%, respectively.
Should you invest?
While the rise in short interest does concern me and reminds me a lot of the short interest build up in industry peer Retail Food Group Limited (ASX: RFG) last year, I do think that if Domino's can deliver on expectations this year then the rewards would far outweigh the risks.
Especially as beyond FY 2018 I think Domino's is well-positioned to continue growing at an above-average rate thanks to its international expansion plans.
These plans will see its store network size almost double over the coming years. At the same time management plans to leverage technology to increase the margins of its stores. Combined, I expect the two could lead to bumper profit growth in the long-term.
Because of this, I agree with UBS that Domino's is a buy, but it is certainly a higher risk investment.
