Domino’s Pizza Enterprises ★★★★Moat rating: NarrowUncertainty:...

Domino’s Pizza Enterprises ★★★★

Moat rating: Narrow
Uncertainty: High
Trailing P/E ratio: 57.5x
Price to Fair Value: 0.64

Domino's Pizza Enterprises(ASX: DMP)is the Australian master licence holder of the Domino's Pizza brand. It also has operations in New Zealand, Japan, Singapore, Malaysia, France, Germany, Belgium, Luxembourg, Taiwan, Cambodia, and the Netherlands.
As a master franchisee, Domino's has limited capital requirements, which means royalty payments it receives in the future should continue to be paid as partially franked dividends. This makes returns on invested capital very attractive and has traditionally led to a rich P/E ratio, which currently stands at over 57 times last year’s earnings.

Domino’s shares have endured a torrid run stretching back to 2021. As well as concerns about a weaker consumer, cost pressures have squeezed profitability across the food service business. This has reduced profits for Domino’s franchisees and led to slower store openings. It has also eaten into profits at company owned locations, which make up around a quarter of the firm’s total store network.

Despite this bump in the road, Johannes Faul thinks Dominos can still increase its Australian store base by about one third in the next few years. The growth opportunity in its European markets looks more substantial, with the potential to more than double its existing store base to around 2,900 outlets during the next decade. Thanks to the attractive economics of franchising, this could result in materially higher earnings down the road. Faul thinks the shares have a fair value of $61 versus a price of around $38 today. He attached an Uncertainty rating of high to that valuation given Domino’s fundamental exposure to the economy and economic cycles.

Domino’s Narrow Moat rating stems from very strong global brand recognition, other intangible assets and cost advantages versus smaller operations. In addition to its brand, Domino’s has highly valuable intangible assets in the form of internally generated intellectual property. The firm is a leader in restaurant logistics and has developed technology tools that build and maintain customer engagement and loyalty. Faul thinks its investments in streamlining its cooking and fulfilment process makes it the "go-to" location for individuals who covet the fastest and most reliable service.