This leading fund manager thinks the Domino’s share price is close to a buy

Leading fund manager Blake Henricks from Firetrail Investments thinks the Domino’s Pizza Enterprises Ltd. (ASX: DMP) share price is getting close to a buy.

The Domino’s share price has been a rollercoaster for shareholders, depending on when someone invested it could have been a great or terrible investment. Over the past five years its share price is up 159%, but since August 2016 it is down 44%.

However, the AFR has quoted Mr Henricks as stating that Domino’s is now trading at only a 20% premium to what he thought its underlying value is, compared to the 100% premium it was trading at previously.

Mr Henrick said “The market’s basically saying that they’re really concerned about Europe, they don’t think it’s the growth story it was and they’ve got concerns about the Australian franchisee business. That’s the opportunity for us to go in there and think ‘Does the market have this right?’

“Every company has a price and I think it’s cheap enough now, but we still feel that Europe just needs a sense of stabilisation. So it’s something we’re definitely looking at and we’ve done a lot to work on but it’s just not quite there.”

The pizza mogul business made a very convincing investment case (aside from the valuation) a couple of years ago. It was creating a global empire of pizza franchises in Japan and Europe whilst generating impressive same store sales growth in Australia whilst paying a rapidly-rising dividend.

However, question marks surrounding the profitability of franchisees due to ‘splitting’ stores has caused sentiment to fall significantly. Domino’s was supposedly expanding its Australian network to reduce delivery times, but that was hurting the existing local stores.

Franchisees were also reportedly underpaying some staff. Some analysts questioned how much money you could actually make on a $5 pizza.

The FY18 result showed the market was right to lower the Domino’s share price from the above-$70 price. Same store sales in Europe and Australia were lower than prior guidance and net profit after tax (NPAT) growth came in at 15%, rather than the 20% growth that was guided.

At the AGM a couple of months ago management said that group same store sales growth was 2.91%. This wasn’t bad, but the growth rate has reduced from previous years.

Foolish takeaway

Domino’s is trading at 24x FY19’s estimated earnings. If Domino’s fell below $40 it could be a decent investment idea considering it is still growing. However, it’s not on my watchlist anymore – there’s a lot of online competition and growth continues to fall.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.

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