The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price has jumped more than 50% since last August and is currently trading at a 52-week high. The price action suggests growing investor confidence in the company’s long-term outlook.
A change in substantial holdings, broker guidance and positive outlook could make the Domino’s share price a buy.
What has caused the Domino’s share price to surge?
Growing confidence in the outlook for Domino’s has been reflected by changes in the company’s substantial shareholders. Earlier this year Domino’s notified the market that the Commonwealth Bank of Australia (ASX: CBA) had increased their holdings in the pizza operator by acquiring more than 900,000 shares. The announcement detailed that the Commonwealth Bank now has a 7.06% shareholder interest in Domino’s, giving the bank voting rights.
Domino’s was also one of the most shorted stocks on the ASX, with more than 10% of the company’s share registry held in short positions. With the company’s share price climbing in 2019 given the positive outlook, many short-holders may have fuelled the Domino’s share price by unwinding their short positions.
How did Domino’s perform in 2019?
Domino’s share price has jumped more than 50% after reporting full-year results for FY19 last August. The company reported revenue growth of 24.4% for the full-year of $1.44 billion and also saw underlying net profit rise by 6% to $141.2 million.
Other highlights for FY19 included a 11.9% increase in network sales of $2.89 billion and 18.2% growth in online sales for the full-year of $1.94 billion. Domino’s also acquired two new territories in Luxembourg and Denmark and saw organic store growth of 179 stores, taking the company’s total store network to 2,522 stores.
In addition to expansion of its global network, Domino’s has also seen digital innovation underpin online sales growth. Domino’s management expects to see a 3–6% growth in same store sales growth and a 7–9% growth in annual store growth for the medium term. Domino’s currently boasts more than 1,000 branded stores in Europe, with management expecting store expansion in France and Germany to deliver growth for many more years.
At the company’s AGM last October, management informed shareholders that the company has already opened 42 stores worldwide in FY20. By 2030, Domino’s aims to have more than 5,000 stores operating across Australia, New Zealand, France, Germany, Japan and other high growth regions.
Domino’s paid a total of $1.15 per share in in dividends for FY19, 7.1% higher than the year prior.
Earlier this month, equity analysts from Goldman Sachs added Domino’s to its conviction list by slapping a buy rating on the stock and raising their price target for the company by 9% to $60.50 a share. Analysts raised their expectations for first half store growth in Japan to 645 stores. Analysts also lifted expectations on store growth in Europe to 1143 in the first half and maintained their forecast for Australia and New Zealand stores of 832. The broker did, however, trim forecasts for earnings before interest, tax, depreciation and amortisation by 1.1% for FY20 and by 1.7% for FY21.
Should you buy?
The increasingly crowded online food delivery sector continues to give Domino’s strong competition. However, through digital innovation the company has managed to stay competitive. This has been reflected in the company’s ‘Project 3TEN’, which aims to deliver fast, affordable and high quality meals to consumers. The goal of the project is to have a meal prepared for carry out in 3 minutes or safely delivered in 10 minutes.
The company’s outlook for same store sales growth and new store growth paint a positive outlook for Domino’s. In addition, continued expansion overseas could help Domino’s provide further shareholder value by gaining exposure to larger, growing markets rather than concentrating on a small domestic market. In my opinion, Domino’s could potentially be a great buy for the medium- to long-term. I think a prudent strategy would be to keep Domino’s on a watchlist and wait for a break in highs or substantial pullback.
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Motley Fool contributor Nikhil Gangaram 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.