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Here’s why Goldman Sachs has a buy rating on Domino’s shares

After the February 2019 interim profit reporting season the analysts at Goldman Sachs updated their forecasts for pizza store franchisor Domino’s Pizza Enterprises Ltd (ASX: DMP) and still rate the business a ‘buy‘ with a $50.50 12-month share price target.

“We upgrade DMP to Buy (from Neutral) based on the solid underlying store growth potential, improving performance in key regions like Japan and a strong upside potential to our target price.” the analysts wrote on March 5 when Domino’s traded just above $42 at not far below today’s price of $44.66.

Domino’s is a former market darling that rocketed from $11 in March 2013 to above $76 in August 2016 when the market rated strong international growth and management’s forecasts a near certainty, but it has since fallen back to earth on concerns around its Japanese business and a couple of missed profit forecasts.

Goldmans also acknowledges some concerns around its growth in France, “In Europe, Benelux has been performing well and store transfers in Germany have been ahead of expectations. France has however been holding the region back and management was required to make additional investments in the 1H19. However, with new management changes in the region and a new aggregator partnership expected in France, turnaround of the region is important.”

In my opinion its Japanese business has also been a disappointment with flat same-store sales as it struggles to impose its formula on a different fast food market to Australia or Europe.

While in Australia same-store sales growth has been broadly declining from admittedly high rates, while the problems with fast-food franchise businesses have been well documented recently with public investigations into the sector on the back of allegations made against Retail Food Group Limited (ASX: RFG) that lost 95% of its value recently.

As such the best days for Domino’s Australian franchisees look behind them, as wage costs are forced higher and the sector comes under more scrutiny.

Arguably the problems facing the business are now priced into the valuation, although in my opinion Domino’s best days are also behind it and the market has it at fair value today. Therefore I’d rate it a hold, unless you were particularly bullish on its European growth prospects.

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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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