Shares in Domino’s Pizza Enterprises Limited (ASX: DMP) were brutally sold off earlier this month following the company’s AGM.
A couple of months earlier, shares reached an all-time high of $167 each. Today, they’re changing hands at $121.7.
DMP share price chart
Here’s a quick refresher of what happened during the AGM.
Trading update
For the first 18 weeks of FY22 sales were up 8%, but on a same store basis, just 4.3% on the prior period.
Covid is still an ongoing headwind across many of its key markets. In Japan, network sales have gone backwards on the prior year since the state of emergency was lifted there.
To make matters worse, the business has been facing some inflationary pressure resulting from a higher demand for labour. Domino’s can choose to absorb input cost increases, or pass these on to customers by raising prices. The latter would weaken its value proposition as a cost leader amongst its competitors, but absorbing the cost would hurt profitability. Either way, it’s not a great situation to be in.
Given the challenges, Domino’s won’t be providing any specific guidance for the time being.
Slowing growth, input cost inflation and uncertainty. It’s easy to see why Domino’s shares were sold off as much as they were.
A quick note on valuation
At around 51x forward earnings based on consensus estimates, it’s no secret that Domino’s shares don’t exactly come cheap.
And while growth rates have slowed recently, I’d argue the steeper valuation is a reflection of the quality management team and their history of fantastic execution. With $216 million of free cash flow generated in FY21, the business is effectively a money printer with the ability to deploy capital as it sees fit.
My take on Domino’s shares
Given management’s history of execution, I certainly would not be betting against Domino’s shares anytime soon.
If you’re thinking about buying shares, you could wait for a pullback until your desired level/valuation, but shares might never reach that point.
Personally, I’d rather slightly overpay for a quality business than miss out altogether. If it were me, I’d almost always start with a small parcel of shares and then add more if I build conviction. This can limit your downside risk, but also your upside potential – it’s a double-edged sword.
For more ASX share ideas, click here to read: 3 ASX shares I’d buy with $10,000.
