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Leading broker upgrades Domino’s shares to a buy rating

The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price could be on the move today after the release of a positive broker note out of Goldman Sachs.

According to the note, the broker has upgraded the pizza chain operator’s shares to a buy rating from neutral with a $50.50 price target.

This price target implies potential upside of 20% over the next 12 months excluding dividends.

Why is Goldman Sachs bullish on Domino’s?

Goldman upgraded Domino’s shares on the belief that it offers a promising growth story due to new store roll outs and strong growth in Japan and the Benelux (Belgium, Netherlands, Luxembourg) regions.

And while the broker has a few concerns over its execution in France, it expects new management and an aggregator partnership to support its growth in that market.

In addition to this, its analysts see a lot of value in the company’s shares following their slide over the last 30 days. During this time the Domino’s share price has tumbled over 11% due partly to a softer than expected half year result.

What are the risks?

There are a number of downside risks to consider before making an investment. Goldman has pointed to its EBA implementation which is expected to increase costs to around 2% of system sales, the Senate inquiry into Franchise Code, and competition from aggregators such as UberEATS.

Should you invest?

I was a touch disappointed with the company’s performance in the first half of FY 2019, but believe it could be worth being patient and holding onto its shares for the long-term for the reasons Goldman outlined. Especially given its long-term plans to almost double its store network in existing territories.

Alternatively, investors could look at KFC and Taco Bell operator Collins Foods Ltd (ASX: CKF). I think it has similarly positive long-term growth potential due to expansion opportunities in European.

Finally, here are three more buy rated shares to consider this month.

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Motley Fool contributor James Mickleboro owns shares of Collins Foods Limited. 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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