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One of Domino’s Pizza Enterprises Ltd.’s (ASX:DMP) biggest supporters warns of possible profit miss

The share price of Domino’s Pizza Enterprises Ltd. (ASX: DMP) has made a big recovery since the February reporting season but one of its top supporters is warning that the company could miss its full-year guidance next month.

The warning comes as the stock rallied another 1.6% this morning to $50.04, up 27% since the end of February compared to a 5% rally by the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) over the same period.

The pizza delivery chain has outperformed other listed food businesses like KFC franchisee Collins Foods Ltd (ASX: CKF) and multi-brand franchisor Retail Food Group Limited (ASX: RFG).

Not even the star of the food industry fresh fruit supplier Costa Group Holdings Ltd (ASX: CGC) can match Domino’s blistering performance over the five months.

But could the pizza party be coming to an end? Morgan Stanley is warning that Domino’s may not be able to hit its FY18 net profit target of 20% when it hands in its results next month.

The broker has been a supporter of the stock with its “overweight” recommendation on Domino’s and is sticking to its buy-call but I think investors shouldn’t rule out a big drop in the stock if management misses its mark given the harsh reaction to Nufarm Limited’s (ASX: NUF) share price yesterday when it issued a profit downgrade.

It’s a poor same-store-sales (SSS) result from the US mothership DPZ International Inc. that has fractured Morgan Stanley’s confidence.

DPZ SSS growth slowed to 4% in the June quarter from 5% in the March quarter and has poured cold water on a potential sales boost from the FIFA World Cup.

“While it’s too early to make a clear read across to DMP based on DPZ disclosure, as most of the Domino’s International network is yet to report, our initial take is that DMP trading has marginally slowed vs our expectation of broad based improvement,” said the broker.

“DPZ commented on the call that the World Cup was a Q3 event for it (and wouldn’t be drawn on 3Q trading to date), despite the World Cup actually starting on June 14th. Clearly, this suggests minimal impact from the World Cup during DMP’s 2H18.”

The Australian-listed Domino’s owns the franchise in Australia, New Zealand and a few European countries like France and Germany.

Local investors were hoping that the football World Cup would spark an increase in pizza deliveries, particularly in France with the national team emerging as the world champion.

DPZ also reported a lower than expected number of new store openings internationally and this implies that our Domino’s may not have opened new stores in Australia quite as quickly as Morgan Stanley believed. This could be due to the company lifting its criteria for accepting franchisees in the wake of the government’s franchising enquiry.

However, the broker thinks a “small miss” is already priced into the stock and that investors shouldn’t lose sight of the bigger (albeit longer-term) opportunity in Europe.

Morgan Stanley has a $65 a share price target on the stock.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia has recommended Collins Foods Limited and 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.

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