Why this top broker just downgraded Domino's (ASX:DMP) shares

This pizza chain operator has fallen out of favour with a leading broker…

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Key points

  • Domino's shares tumbled on Monday and are now down by over a third in 2022
  • Goldman Sachs has concerns over risks in Asia
  • This led to the broker downgrading the company's shares today

The Domino's Pizza Enterprises Ltd (ASX: DMP) share price started the week deep in the red.

The pizza chain operator's shares dropped 4% to $78.95.

This means the Domino's share price is now down almost 36% since the start of the year.

Why did the Domino's share price tumble?

Investors were selling down the Domino's share price on Monday after the pizza chain operator was the subject of a broker note out of Goldman Sachs.

According to the note, the broker has downgraded the company's shares to a neutral rating and cut the price target on them by 34% from $136.20 to $89.90.

While this is still meaningfully higher than where the Domino's share price trades today, it doesn't appear to have been enough for some investors to stick with it.

What did Goldman say?

Goldman Sachs was disappointed with the company's performance during the first half. And while it remains positive on its growth outlook in the ANZ and European markets, it fears that medium term risks in Asia are building.

It commented: "DMP reported 1H22 NPAT at -10.3% below GSe and -9.1% vs. Visible Alpha Consensus Data. About 75% of this earnings miss came from the Asia region, largely driven by underperformance of sales in Japan from early 2Q22. The operating deleverage from this factor was greater than GSe as underperformance from fortressed stores was strong."

"We continue to see a strong earnings growth outlook in the ANZ and Europe regions at c. 6.8% and +17.7% CAGR respectively over FY21-24e. Additionally, we expect the group to continue to engage in M&A activity over the short term either in terms of expansion to new regions or bolt-on acquisitions within the existing regions in line with its stated strategy. However, the emerging risks in Japan remain stronger than these growth opportunities for DMP, in our view," it added.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Dominos Pizza Enterprises Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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