Why now may be the time to invest in your slice of Domino's


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Key statistics: ASX: DMP

Closing share price: $40.160

52-week high: $67.050

domino's pizza stores franchise shares hot stock

52-week low: $38.110

Most recent dividend: 58.100c

Annual dividend yield: 2.55%

Franking: 40%

The share price of Domino's Pizza Enterprises has almost halved since July 2016. But it's a remarkable business and a buying opportunity beckons.

Domino's aims to reduce waiting times to three minutes for takeaway and 10 minutes for delivery.

It's an ambitious goal but super-fast service is just one way Domino's differentiates itself from competitors.

The company's impressive business model has driven earnings per share from 18 cents to 134 cents over the past decade.

While Domino's does run some company-owned stores, the business model is less about selling pizzas than selling franchises. Revenue comes mainly from the fees and royalties it charges - and the food it sells - to franchisees. Network sales will exceed $2.5 billion in 2018.

The business model is tremendously powerful. Domino's devises crowd-pleasing menus, adopts standardised systems and technology, and saturates the market with stores. This results in lower costs, so Domino's franchisees can sell pizzas for less than competitors.

dominos buy hold or sell stock shares hot stock asx dmp

With about 800 stores, Domino's business in Australia and New Zealand is starting to mature.

Domino's is repeating overseas what it has already done in Australia with a grand tour of Europe. In 2006, Domino's acquired around 150 Domino's stores in France, Netherlands and Belgium from Domino's Pizza Inc (the NYSE-listed brand owner and franchisor).

Since then, Domino's has acquired other pizza chains in all three countries plus Germany. The company now has around 900 stores in Europe and aims to have 2600 by 2025.

With a much longer growth runway in Europe than Australia, it's a particularly exciting period.

Despite underlying net profit growth slowing to 7% in the first half of 2018, management is forecasting a much stronger second half. However, market expectations for 2018 earnings per share of $1.56 - up from $1.34 in 2017 - might be a little high. There's some chance of a downgrade or earnings disappointment - and we'd like to be ready if an opportunity arrives.

Unlike your pizza, a buying opportunity in Domino's is probably more than 30 minutes away. With a bit of luck and patience, however, one could arrive this year - so put the stock on your watch list. Existing shareholders can HOLD.

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James Greenhalgh is a senior analyst at Intelligent Investor (under AFSL 282288), owned by InvestSMART Group Limited. James graduated with a Bachelor of Commerce shortly after the 'recession we had to have'. After stints in financial planning and with stockbroking firm County Natwest, he realised that poring over annual reports was his true vocation. James has 24 years of investing experience under his belt, with almost half of them at Intelligent Investor. His main areas of focus are the retail and media sectors. To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.
April 12, 2018 12.44pm

Very interesting point of view from the author. However, it raises so many questions for me, as the CEO of the company has been dumping his shares since mid last year, whilst the company has been buying them back to the value of exceeding $170,000,000. Furthermore, since last year the company has missed 2 consecutive profit forecasts. They are either unable to forecast correctly or they can't operate so they deliver the forecast as they promised.

Then on the company's Business Model. The company that relies on making the profit from their Franchisees and not the products they sell to their clients is limiting their growth. As the wider public as the customer base make the suitable growth path, while the limited number of the Franchisees that are squeezed by fees, charges, and expensive products are forced into bankruptcy. Hence, the company needs to expand their operation in other territories, like Europe. However, in order to achieve this task, they need to borrow funds to invest. And this will cause liability and risks. Especially when the markets like France and Japan do not make a profit.

Therefore, despite all these risks, how can a stock that has been in the downfall trend since Jan 2017 can be a good investment when, not even their CEO with 5 Margin Loans on his Domino's Share Portfolio can hold on to them. This is even worse when the CEO of their European arm has 2 Margin Loans on his Domino's Share Portfolio.