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Is the Domino’s share price too expensive?

is it a buy

The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price has soared during COVID-19. Since bottoming out at a 52-week low of $41.66 during the mid-March market crash, Domino’s shares have more than doubled to $84.64 at the time of writing.

But with a price-to-earnings (P/E) multiple of around 50, is the Domino’s share price overvalued?

How has Domino’s performed recently?

In the company’s FY20 annual report, Domino’s reported global sales of $3.27 billion, an increase of 12.8% over FY19. Earnings before interest, tax, depreciation and amortisation (EBITDA) came in at a record $303 million, while net profit after tax grew by 3.3% year-on-year to $145.8 million.

The strong result was driven by impressive gains in the Japanese market. Domino’s Japan delivered 25.9% growth in sales year-on-year, with 75 new stores opening across the country in FY20. Sales growth was a more modest 5.1% in Europe and 4.1% in Australia and New Zealand, with both of those geographies reporting small declines in year-on-year EBITDA.

The broad drivers behind the result seem obvious. With many countries around the globe implementing some form of lockdown to halt the spread of COVID-19, restaurants have been closed and consumers have been spending more time at home. In these situations, demand for home-delivered meals has increased. With the notable exception of France and New Zealand, Domino’s outlets have remained open in some form or another in most jurisdictions throughout COVID-19.

A similar set of drivers have been behind the enormous share price gains made by meal-kit delivery service Marley Spoon AG (ASX: MMM). That company has also reported huge spikes in revenues throughout the pandemic, and recently upgraded its 2020 revenue guidance for year-on-year growth of between 80% and 100%.

However, the key question is whether this sort of growth can persist as more geographies emerge from lockdowns. Once people can resume eating out at restaurants again, what will it mean for the Domino’s share price?

For its part, Domino’s maintains a fairly bullish outlook. It forecasts same stores sale growth in the range of 3% to 6% over the next 3 to 5 years, and has its sights set on having a global network of 5,500 stores by 2033 (it currently has 2,680 stores).

About the Domino’s share price

Personally, I’m kicking myself for not buying Domino’s shares back in March at the height of the global coronavirus panic. In the intervening months, the company has adapted well to the ‘new normal’ of social restrictions and rolling lockdowns, boosting digital sales channels and embracing COVID-safe strategies such as zero contact delivery.

However, I do tend to think that Domino’s shares are overvalued at current prices. With a P/E multiple approaching 50, this makes its shares significantly more expensive than ASX competitor Collins Foods Limited (ASX: CKF), which currently trades at a multiple of a little under 40. Collins Foods operates KFC restaurants in Australia, Asia and parts of Europe, as well as the Australian Taco Bell network.

That being said, I also think that Domino’s is a much better and more mature business than Collins Foods, with better long-term growth prospects. It’s just that excitement around its short-term performance has overinflated its share price. My advice would be to keep the company on your radar – if there is a pullback in the Domino’s share price, it could still be well worth adding it to your portfolio.

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. 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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