The Domino's Pizza Enterprises Ltd (ASX: DMP) share price is trading flat at $45.81 today despite research house Morningstar Australia upgrading the shares to a "buy" according to reports in the News Corp (ASX: NWS) press.
Morningstar evidently feels Domino's shares are undervalued based on its current valuation, so let's take a look at a few reasons why they might be right.
- Domino's has an almost second-to-none track record of earnings growth over the last 6 years that has seen its share price increase from $9.33 on November 16, 2012, to $45.81 today. The past is no guide to future performance but generally companies that consistently grow earnings will reward patient investors over the long term.
- Domino's dividends have also climbed from a total of 26 cents per share in 2012 to $1.07 per share in 2018. Generally if you can quadruple your dividend payouts every 6 years, you are going to reward investors handsomely.
- Domino's growth strategy is double pronged in that it aims to grow sales at existing stores organically through product innovation (new pizzas, chicken wings, etc) and by opening new stores under a franchise or owned-in-house model. At its recent AGM the group reported same-store sales for the first 17 weeks of FY 2019 were up 2.9% on the prior corresponding period. While it opened 36 new stores over the year to date in FY 2019.
- Domino's also has a global expansion strategy that has room to run. It has recently moved into the large markets of France and Germany via acquisitions, with plans to improve profit margins via efficiencies. At its recent AGM it also reported that the previously problematic Japan market was showing signs of a turnaround under a new management team.
- Domino's is currently trading at just over 25x trailing earnings per share of $1.79 and this is actually cheap compared to trailing price-earnings multiples it has historically traded at.
Therefore Morningstar may have a point in suggesting that now may be the time to gobble up some Domino's shares. Others in the fast food space include KFC-franchisor Collins Foods Limited (ASX: CKF) and indebted coffee and pizza business Retail Food Group Limited (ASX: RFG).
