We have considered the forward PE (price-to-earnings) multiple for our analysis due to high visibility in Domino’s (DPZ) earnings. The forward PE multiple is calculated by dividing Domino’s current stock price by analysts’ earnings estimate for the next four quarters.
Domino’s forward PE multiple
Domino’s management worked to enhance customers’ experience. Also, better-than-expected 1Q17 earnings appear to have increased investors’ confidence, which led to a rise in the company’s stock price and its valuation multiple. As of July 12, 2017, Domino’s was trading at a forward PE multiple of 35.6x—compared to 32.6x before the announcement of its 1Q17 earnings.
Domino’s aggressive expansion strategy and higher same-store sales growth and margins allowed the company to trade at a higher multiple than its peers. On the same day, Papa John’s (PZZA) and Yum! Brands (YUM) were trading at 25.4x and 25.0x, respectively.
To enhance customers’ experience, Domino’s implemented the “AnyWare” ordering platform. It allows the customer to complete the transaction from Facebook Messenger or Google Home. The company also installed Domino’s Tracker and continued to reimage its old restaurants to drive its sales. These initiatives are expected to increase the company’s expenditure. If the initiatives don’t generate expected sales, the increased expenses are expected to put pressure on Domino’s margins and lower its earnings. Rising competition and higher discounts from peers could also hurt the company’s earnings.
For the next four quarters, analysts expect the company to post EPS growth of 20.5%, which could have been factored into Domino’s current stock price. If the company posts lower earnings than analysts’ estimates, selling pressure could lower the company’s stock price and its forward PE multiple.
You can mitigate these company-specific risks by investing in the Consumer Discretionary Select Sector SPDR Fund (XLY), which has invested 12.1% of its holdings in restaurant and travel companies.
Next, we’ll look at analysts’ recommendations for Domino’s.