Two leading analysts have given different assessments of Domino’s Pizza ahead of its Q1 results on Thursday.
Simon French of Panmure Gordon reiterated his Sell recommendation, saying that predicted growth at the company doesn’t justify the stock’s rating. In contrast, Douglas Jack at Numis moved his stance from Buy to Add and raised his Target Price from 625p to 700p, predicting a “strong pick up in trading”.
French said: “In the first seven weeks of 2013 trading was lackluster with UK LFL sales +1.6% although the underlying trend (stripping out the impact of closed store days due to snow) was c1% higher.
“The group should report an improvement in trading benefitting from recent inclement weather which should have been a net positive. We therefore forecast c3% UK LFL sales growth for Q1 (comparative: +3.6%).
“The stock trades on a 2013E P/E of 24.7x and an EV/EBITDA of 17.5x. We forecast 8.1% EPS growth this year which simply cannot justify the stock’s rating. The group faces a tough comp in Q2 and we reiterate our Sell recommendation and 360p Target Price.”
He added: “The group faces a very challenging Q2 UK LFL sales comparative of +8.1% reflecting last year being the wettest Q2 on record, the Diamond Jubilee celebrations and Euro 2012. We are encouraged by the progress the group is making in Germany but it will be 2015 before the country moves into profit.
“We forecast £50.2m PBT (23.7p EPS) for 2013E slightly below consensus expectations of £51.2m PBT (23.9p EPS). Our forecasts imply 8.1% EPS growth in the current financial year although on a three-year view our forecast CAGR in EPS is 11.6%. We forecast dividends to grow in line with earnings.”
Jack said: “We expect LFL sales to have picked up significantly over the last six weeks, such that Q1 LFL sales should be comfortably ahead of our 3% full year assumption. We believe the company is capable of generating c.20% earnings growth from 2014E, implying a sub-20x P/E (2014E) for a company with almost zero debt and capex.
“We upgraded our forecasts slightly in February, despite increased European infrastructure investment, following a 22% increase in underlying earnings in the UK in 2012. This was driven by a 7.6% net increase in the size of the UK estate, 5.0% LFL sales growth and strong underlying margin growth (increasing volumes on a relatively stable cost base).
“UK LFL sales rose 1.6% (2.6% before snow-related closures) during the first seven weeks of 2013. LFL sales should have accelerated over the subsequent six weeks due to: including half-term; ongoing cold weather; higher advertising, 1-1 smart marketing; and new product launches (such as the hot-dog stuffed crust).
“Two weeks ago, Domino’s launched the “Midweek Rescue Service”, offering 50% off pizzas between 4pm and 6pm from Monday to Friday. Targeting a traditionally quiet trading period, this is not expected to cannibalise other trading, thereby benefiting Domino’s by adding extra volume on a relatively stable cost base and franchisees by adding incremental gross profits.
“LFL sales should be growing in Germany (2012’s LFL sales rose c.20% in two mature stores) and Switzerland. Given that the German estate should double in size (to 36 units) this year, trading should benefit from increasing brand awareness.
“We expect to hold our 2013E forecast which, very cautiously, assumes UK margins fall for the first time. LFL comparatives will be tougher in Q2 (at 8.1% vs Q1’s 3.7%), but this should be partially offset by new product launches and the new midweek promotion. We believe the UK can sustain a c.15% PBT growth rate through to 2021E, with Europe adding another c.5% pa. In addition, we estimate Domino’s could return c.£0.7bn to shareholders over this nine-year period.”
