The Domino’s DMP food empire is largely focused on the operation of retail food outlets and franchise service. The pizza conglomerate holds the exclusive master franchise rights for the Domino’s brand and network across Australia, New Zealand as well as a handful of Asian and European countries. Australia is the fourth-largest market for the company, behind the United States, United Kingdom and India. Despite its concrete presence in the country, Morningstar believes that it can still increase its store base by the midteens over the next decade.

Based on our fair value estimate of $58.00 and the last share price of ~$32, Domino’s offers an attractive proposition with an approximate price/fair value of 0.55, trading at almost half of its potential value and further down from 0.64 in June 2024.

  • Moat Rating: Narrow
  • Share Price on 18/09/2024: $31.93
  • Fair Value: $58.00
  • Price to Fair Value: 0.55 (Undervalued)
  • Uncertainty Rating: High

Why we’re bullish

Through the perils of the Covid-19 pandemic and the tumbling share price over the past few years, the market remains sceptical about performance amid ever-present concerns about cost-of-living pressures effecting the food and beverage industry, among many others.

Dominos pizza

Despite an underwhelming start to FY 2025 with underlying net profit after tax falling 2%, Morningstar believes the market is extrapolating the company’s currently weaker state and underestimating its massive growth potential.

With high levels of cash generation, a reduced capital expenditure outlook and exemplary capital allocation, we prescribe a five-star rating to the equity and will explain why below.
Domino’s is assigned a narrow economic moat through a combination of cost advantages, strong brand recognition and intangible assets. It derives its primary strength from being a leader in restaurant logistics and technology that pushes sales through digital channels. From a brand association perspective, its high brand awareness allows leverage to market and operate at a lower average cost per outlet, in opposition to its smaller competitors.

The company’s FY23 net leverage ratio (net debt over rolling 12-month EBITDA) peaked at 2.9x, close to the 3.0x prior banking covenant requirement in FY23. However, this has since begun easing towards moderate to healthy levels through active capital management initiatives such as a ~40% reduction in capital expenditure from FY23 to FY24. Subsequently the net leverage ratio has since fallen to 2.4x after these changes have been implemented.

The highly cash-generative corporation has been able to finance capital requirements through free cash flow as well as a dividend payout ratio of ~80% and moving towards healthy levels of gearing.

Despite a High Uncertainty Rating due to the firm’s exposure to the economic cycle, our analysts found that revenue generation was less elastic and less sensitive to the economy than the average business.

An Exemplary Capital Allocation Rating has been given to Domino’s due to exceptional investment decisions, appropriate distributions to shareholders and a sound balance sheet.

The most recent example of this is the fully underwritten Dividend Reinvestment Plan announced in August 2024, which allows eligible shareholders to be issued shares at a 1.0% discount with Domino’s largest investor already having confirmed their participation.
Overall Morningstar believes this is far from a mature company with massive growth potential through the global franchise network which is expected to approach 6,000 stores by FY 2034.

Bulls say

  • High visibility brand based on a successful US business model.
  • Sales have increased across Domino’s three regions at a CAGR of 9% over the past five years. We expect network sales to continue in the high single digits over the next five years.
  • The pizza market in Europe is highly fragmented, presenting significant opportunity for Domino's to take market share with an attractive value proposition, increased convenience to the customer, and a differentiated product offering.
  • Domino’s large network size has positive implications for discounted supplier arrangements.

Bears say

  • There are high levels of competition within the industry stemming from independent pizza stores and other quick-service restaurants.
  • The company risks evaluating its target markets in new countries incorrectly, given the geographical distance and cultural variances.
  • Low-price business model may still be affected by slowing retail and discretionary spending.

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.