Is the Domino’s Pizza Enterprises Ltd. (ASX: DMP) share price a buy?
The Domino’s share price has actually risen by 67% over the past six months in a remarkable performance by the pizza business since the COVID-19 crash.
It has been one of the ASX businesses most prepared for the COVID-19 pandemic because how much investing it has done into its online ordering systems over the previous years.
Domino’s made sure it helped its outlets get COVID-19 ready so that it could continue to serve customers efficiently and safely.
With so many other food locations closed because of COVID-19 restrictions, Domino’s was well placed to step into the gap.
Domino’s produced a solid set of numbers for FY20 because of the COVID-19 impacts.
Network sales increased by 12.8% to $3.27 billion. Online sales rose by 21.4% to $2.36 billion. Domino’s reported that its earnings before interest and tax (EBIT) grew by 3.6% to $228.7 million and free cashflow increased by 90.7% to $161.9 million.
There was a mixed performance across its store network.
In Japan it generated a record performance across multiple metrics, attracting new customers and increasing order frequency. Japanese earnings before interest, tax, depreciation and amortisation (EBITDA) rose 29.9% to ¥7.5 billion. It’s good that the Japan market has improved because it was a troublesome market for a while.
In Europe there were short-term closures in France and support for franchisees, reducing EBITDA by 1.5% to €50.6 million.
In Australia and New Zealand, increased safety and franchisee investments protected the network but reduced EBITDA by 5.8% to $129.4 million.
What about FY21 and beyond?
The Domino’s share price, indeed all share prices, are meant to be forward looking. The pizza business is continuing to expect to grow its revenue base over the coming years. It’s expecting annual same store sales growth of 3% to 6% over the next three to five years. It also expects to add annual organic new store additions of 7% to 9% over the medium-term.
If it achieves those goals then it could see earnings grow by double digits over the next five years. That could also mean that the dividend can grow at a good pace too.
I think that Domino’s looks like it can deliver good business growth over the next few years. The company has invested heavily in technology and it’s now benefiting from that.
The key question is whether Domino’s is worth buying today.
At the current Domino’s share price it’s valued at 31x FY23’s estimated earnings.
Domino’s is expecting a lot of growth over the next decade. Quite a lot of the new growth is expected to come from new stores. Hopefully that doesn’t cause competition with existing Domino’s stores.
The company is priced fairly highly. Will growth be hampered when most other food places are at full capacity again? Domino’s may well see momentum slow down across its global network.
Other food ideas
Domino’s isn’t the only food business on the ASX that could be worth looking at.
Fish business Tassal Group Limited (ASX: TGR) is steadily growing operating earnings and is trading at just 9x FY23’s estimated earnings.
KFC franchisee company Collins Foods Ltd (ASX: CKF) keeps growing its earnings and store network.
Farm owner Vitalharvest Freehold Trust (ASX: VTH), the owner of citrus and berry farms, is trading at cyclical lows.
Domino’s has done very well since COVID-19 impacted the world. But it’s now trading at a high valuation, so I think it’s worth taking a look at other food ASX shares such as the three I just mentioned – I believe all of them are trading at better valuations compared to Domino’s. But Dominos could keep growing nicely if its store rollout is a success.
But I think there are better sectors to look at for returns than food, I’m looking at other share opportunities at the moment.
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Motley Fool contributor Tristan Harrison 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.