Why Domino's Might Fail to Deliver
While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Domino's Pizza slipped 2% today after Oppenheimer downgraded the pizza delivery company from outperform to perform.
So what: Along with the downgrade, analyst Brian Bittner removed his price target of $64, suggesting that he sees limited upside and possibly even significant downside from these levels. The stock has skyrocketed over the past couple of years on better-than-expected growth, but Bittner believes far too much optimism is baked into the current valuation.
Now what: While Oppenheimer believes Domino's fundamentals will continue to improve, the firm outlined several reasons why its shares may not:
1. Earnings upside opportunity appears constrained (low operating leverage and a lack of financial engineering catalysts);
2. Comps now enter a cycle of tough comparisons and growth will likely decelerate without identifiable grow-over drivers (such as pan pizza last year); and
3. Valuation (25 times P/E, 16 times EV/EBIT) is at an all-time peak (now in line with DNKN) and multiple expansion from here is difficult to justify following the stock's outperformance of the past two years (+192%, vs. S&P +41%).
Given that Domino's certainly looks priced for perfection, Fools would do well to heed Oppenheimer's warning.
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The article Why Domino's Might Fail to Deliver originally appeared on Fool.com.
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