Domino's Pizza Enterprises Ltd (ASX: DMP) shares had a tough time last week.
The ASX 200 pizza chain operator's shares tumbled after announcing store closures in France and Japan.
While this is disappointing, Goldman Sachs thinks that its shares have now bottomed and that the risk/reward is now firmly skewed to the upside.
What is the broker saying about this ASX 200 share?
Goldman has been very cautious about Domino's for some time. However, while the market may not have liked its update last week, its analysts have now seen enough to become confident in the company's outlook. It explains:
We have been relatively cautious on DMP's growth strategy since we assumed coverage in July 2022 on a combination of Japan store over-expansion and digital under-investment concerns. That said, in our Europe Investor Day preview we noted a critical catalyst that would make us more positive as "re-prioritizing store unit economics over store growth."
It notes that Domino's store closures and growth plans are a sign that this critical catalyst is now taking place.
As a result, the broker has upgraded the ASX 200 share to a buy rating with an improved price target of $42.20 (from $36.30). Based on the current Domino's share price, this implies potential upside of 25% for investors over the next 12 months.
In addition, the broker is forecasting dividend yields of 3.2% in FY 2024, 3.9% in FY 2025, and 4.7% in FY 2026.
Goldman summarised three key reasons why it upgraded the ASX 200 share. It said:
1. Refocusing on store unit economics to restart virtuous growth cycle: The company's July 17th market announcement that it will close ~80 of Japan's (8% of Japan network) and ~20-30 of France's (5% of France's network) underperforming stores and focus on restoring store unit economics is a positive strategic pivot, in our opinion.
2. DPZ and DMP Germany provide a blue-print for digital capability catch-up: While DMP is no longer the digital leader in global Pizza QSR (digital scorecard in exhibit below) at a time where we believe digital capabilities competitiveness is critical, we are encouraged by the success of DPZ's digital investments most notably the relaunch of its loyalty program and DMP Germany's lead market stance driving positive results.
3. Attractive Valuation: Based on last close of A$33.12/sh, the stock is now trading at 20x FY25eP/E and 17x FY26e P/E, on the back of FY24-26e EPS CAGR of 21% EPS, implying ~1.0x PEG.
