Why Domino's Might Fail to Deliver

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.

Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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