Wondering what that smell is? It’s the share price of Domino’s Pizza Enterprises Ltd. (ASX: DMP) getting burnt!
The stock crashed 2.1% to $53.84 in the last hour of trade when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is at around breakeven.
Shareholders of the pizza franchisor can at least be grateful that the stock isn’t getting torched like milk products company Bellamy’s Australia Ltd (ASX: BAL), lithium miner Galaxy Resources Limited (ASX: GXY) and building materials supplier Boral Limited (ASX: BLD) as their share prices tanked between 5% and 7.5% at the time of writing.
But if you are wondering what’s dragging on Domino’s mojo today, you’d need to look overseas.
The master franchisor and US-listed company Domino’s Pizza, Inc. (NYSE: DPZ) released its quarterly results that sent its share price surging over 3%.
But what’s good for the goose can sometimes cook the gander. The mothership is benefitting from strong growth in the Asia Pacific but its European operations are losing ground.
That’s bad news for the ASX-listed pizza chain as it is banking on strong same-store sales growth (SSSg) in its European operations to meet its ambitious earnings targets.
The news shouldn’t come as too big a surprise to DMP’s shareholders though as management had indicated that the hot summer was negatively impacting on sales.
But Morgan Stanley doesn’t think this is time to panic and that the sell-off may be a buying opportunity.
“Much of DPZ’s trading period has already been covered by DMP’s FY18 (ended July 1) or its five-week FY19 trading update ended 5 August,” said the broker.
“DPZ indicated that SSSg in Europe was negative in the 3Q, which compares with DMP’s July 2 to August 5 European SSSg of 1.6%.”
What’s more, Morgan Stanley pointed out that SSSg from the US group will always be lower than what DMP reports because DMP excludes store splits from SSSg calculations, whereas the mothership includes splits.
The broker is reiterating its “overweight” recommendation on the stock and its $65 a share price target as it believes DMP can keep outperforming the broader market with the stock up 18% since the start of the year.
There are reasons why investors shouldn’t jump the gun and assume the worst, but no matter how you shake and bake it, Domino’s Pizza, Inc.’s earnings update certainly introduces downside risks to DMP.
This makes DMP’s investor day briefing tomorrow a must-watch event.
Investors who believe in the saying “if you can’t take the heat, stay out of the kitchen” might be better off looking elsewhere for opportunities.
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Motley Fool contributor Brendon Lau owns shares of Boral 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.