Have their competitor's suffered from the Domino effect?
Domino's Pizza Enterprises Limited (ASX:DMP) holds the exclusive master franchise rights for the Domino's brand and network in Australia, New Zealand, France, Belgium, the Netherlands and the Principality of Monaco. It is also the largest franchisee of the Domino's brand in the world. The Domino's brand is owned by Domino's Pizza, Inc, a listed US company.
'Domino's Pizza' is an innovative business. It is continuously enhancing the quality of the ingredients used on their pizza's which results in a "healthier menu".
Domino's Pizza has 563 stores in Aus/NZ and 326 stores in Europe which totals 889 stores across their network. They plan on opening 60 - 70 stores this financial year. Domino's is the market leader in Pizza in Australia, New Zealand, France, and the Netherlands and holds the number two market position in Belgium.
Is this business easy to understand?
Domino's Pizza is a business we can all understand. What make Domino's Pizza profitable are the benefits from the technological innovations introduced. It is these innovations that have entrenched their place in the fast food market.
Domino's have embraced the use of modern technology for ordering pizza online. They turned the 'simple' pizza business into a world-class logistics operation with their 'Pizza Tracker'. The Pizza Tracker allows customers to track when their order will be delivered in 'real-time'.
The other aspect of Domino's Pizza that I like is the fact that their cash flow is very similar to their reported Net Profit after Tax. This is likely due to the fact that consumers pay for their order at the time of purchase so there is no time lag for the business to collect money from debtors.
Does this business have a sustainable competitive advantage?
§ Domino's Pizza is a household brand name which has been built over many years.
§ Domino's have presented recently that they are the most popular pizza website in Australia.
§ Domino's have embraced online technology and receive a large number of orders via this communication mean. And, about a third of their orders come in via smart phones nowadays.
§ Domino's have developed their 'Pizza Tracker' which is as sophisticated as any logistics operation in Australia. With the Pizza Tracker, customers can see in 'real-time' where their order is so they know when it will be delivered to their door.
§ Domino's have further expansion and growth opportunities available by opening new stores both in Aus/NZ and Europe.
These advantages seem to be paying off, with Domino's Pizza achieving same store sales growth of 8.4% across their business compared to the previous six month period.
What are the risks facing this business?
A slowing in the economy if it occurs will no doubt have an impact on Domino's Pizza. As we know, pizza is a discretionary food item and not a 'staple'. It does lend itself to being cut out of the family budget during tougher economic times.
Another risk is the reality that pizza is not a 'health' food. As a parent of growing boys, pizza is a 'sometimes' food and a treat. Domino's are making progress in this area, and are working to overcome the perception that pizza is unhealthy. They are using 'lower fat' and better quality ingredients in order to reduce the calorie intake of their pizzas.
Is it run by able and trustworthy management?
The CEO and MD is Don Meij. Don appears to be about the most enthusiastic manager of a business I can recall seeing. I watched Don interviewed a couple of months ago on Switzer, http://www.switzer.com.au/video/don-meij video here and was very impressed with his views on the long term outlook for Domino's Pizza.
I like that management continually find ways to innovate, in order to maintain happy customers and stay one step ahead of their competition.
The business is operating with no net debt, and management seem to be very able and trustworthy.
Is it trading at a bargain price?
Domino's Pizza is trading at a price well above my estimate of intrinsic value. While Domino's Pizza is an excellent growth story, the market price is excessive. Recent investor's in this business are paying a "growth premium". The growth story has caused some irrational exuberance on the part of investors in this business since August 2011.2011 Actual Valuation = $3.56
Today's Share Price = $8.202012 Forecast Valuation = $4.37
2013 Forecast Valuation = $5.42
2014 Forecast Valuation = $5.88
*Please note that this estimate of intrinsic value is subject to change on a daily/weekly basis.
In summary, Domino's Pizza is a fantastic business with high profitability, amazing cash flow, minimal debt and sound management. It has all the right 'ingredients' apart from the opportunity to buy it currently at a bargain price. I do hope to be a share holder in this business one day as Domino's Pizza is a great business. However, paying a high price for a great stock on the ASX does not necessarily make a good investment.
This article is published by Dean Mico.
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