Sharper re-banding paves way for Domino’s foray beyond pizza

As one of Australia’s most impressive growth stocks with one of the market’s best investment-grade balance sheets, Domino’s Pizza Enterprises (ASX: DMP) half yearly result for the six-month period ending 31 December 2015 was always on the cards to impress.

But behind its outstanding 29.6% jump in revenue, and reported profit of $43.3 million (up 41%), is an equally impressive move to not only dominate the pizza market, but gain a greater slice of the broader fast food business, and as such the company has dropped the ‘Pizza’ from its moniker.

Underscoring the amazing growth it’s experienced over the last eight years is Domino’s commitment to technology-driven innovation, its investment in its people and the continued expansion of its global footprint.

The business is now being valued less like fast food retailer and more like a high-growth tech-stock with a forward PE ratio for 2016 over 60, and is trading at a 70% premium to its intrinsic value.

That’s great for shareholders, but anyone contemplating the stock has every right to question whether it still makes sense to buy the stock at $59.63.

Once you factor in the stock’s growth trajectory, the short answer is probably yes.

In the most recent half year result, earnings per share (EPS) increased 50% over the previous first half, and EPS is projected to continue growing at 50% annually over the next three years.

While return on equity (ROE) is expected to grow from 25.24% in 2016 to 31.40% in 2018, net-debt to equity (23.47%) has steadily been decreasing due to increasing equity within its businesses.

All geographical businesses have delivered strong organic growth – with the Japanese business reporting a 51% increase in operating profit – while recent acquisitions in Germany and France have yet to contribute to results.

What Don Meij, the group’s CEO and managing director expects to continue to improve productivity – and drive sales in the second half and beyond – is the company’s significant investment in its digital pipeline, plus the continued opening of more stores.

He expects the next six months to be just as strong with the company set to achieve a record number of organic new store openings – in excess of 60 new stores in full year 2016, excluding acquisitions – with record high profitability stimulating strong organic growth.

Including acquisitions, the company expects to open between 460 and 500 stores in full year 2016 alone.

What’s also music to the market’s ears is the decision by Domino’s to up its 2016 full-year guidance to net profit growth of 35%.

Same-store sales across Australia and NZ are expected to be between 11% and 13% higher, and in Europe same store sales guidance has also been increased to between 8% and 10%.

Since the ASX price enquiry earlier this month, Domino’s share price has regained most of the 20% fall when it dropped as low as $48.56 on 5 February.

It’s true, some franchisees are under a lot of pressure from the delivery guarantee that Domino’s has put them under, and this seems to have concerned the market.

However, franchises remain the most profitable they’ve been in Domino’s history, and there seems to be a renewed confidence in Domino’s growth pipeline to justify valuations are current levels.

It’s the company’s growth trajectory and plans to continue expanding beyond pizza that also seem to be allaying initial fears that Domino’s lofty valuations have set it up for a big fall if market conditions deteriorate.

To be able to continue the size and scale of growth that Domino’s wants to deliver, Don Meij plans to go after hamburgers, fried chicken and sandwiches.

Domino’s already has an extensive chicken range, but any foray into burgers and sandwiches would be first for the chain.

With only an 8% share of Australia’s broader fast-food market, Domino’s has plenty of opportunity to target its rivals, and seems to have McDonalds, KFC direct and Oporto on its radar.

If Domino’s can bring its tech-story around GPS tracking and four-click ordering – which underscores the competitive advantage it has within the pizza business – to other parts of the fast food business, its ability to grow its share of Australia’s broader fast-food market looks very promising.

Any price around $55 makes for a more attractive entry point into this growth stock.