The market may have dropped lower today but that hasn’t stopped the Domino’s Pizza Enterprises Ltd (ASX: DMP) share price from storming higher.
In afternoon trade the pizza chain operator’s shares are up a sizeable 3.5% to $47.51. This means that Domino’s shares have now risen over 8% since this time last week.
Is it time to buy Domino’s shares?
I think it is. While in the short term its share price may be reasonably volatile as the bulls and the bears battle it out, I feel confident that in the long-term its share price will be climbing notably higher from here.
This is because Domino’s aims to grow its store footprint significantly over the next seven years from 2,193 stores in December 2017 to 4,650 stores in June 2025. In addition to this, management is aiming to leverage technology and efficiencies to widen the margins of its operations meaningfully.
The combination of the growth in its store network, increasing same store sales, and wider margins should ultimately lead to sizeable profit growth over the next seven years.
Why buy now?
I think that 30x estimated full-year earnings is a reasonably fair price to pay for a company that expects to grow its profits by 20% in FY 2018 and has such bold long-term growth plans.
Whilst there is a danger than Domino’s could fall short of its guidance after its weak first-half, I feel more confident by the day that it will achieve its targets.
This is because its financial year is due to end on June 30, which is just five weeks away. I would have thought by now that the Domino’s management team will have a good understanding of what its full-year results will look like and would have updated the market if it was going to miss its guidance.
So with the market expecting the worst and short sellers taking up a good portion of its share registry, there could be a nice boost to its share price in the short term if its results are in line with its guidance.
Though, conversely, it is worth considering that there is always a risk that management is leaving it to the last minute and could come out with a profit downgrade in June. This would almost certainly hit its share price hard.
But overall I would say that the risk/reward on offer from a long-term investment is compelling and that investors ought to consider it alongside industry peer Collins Foods Ltd (ASX: CKF).
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Motley Fool contributor James Mickleboro owns shares of Collins Foods Limited. The Motley Fool Australia has recommended Domino's Pizza Enterprises 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 Scott Phillips.