The ASX 200 share that could thrive in a recession: Scott Phillips

A woman holds a piece of pizza in one hand and has a shocked look on her face.

A woman holds a piece of pizza in one hand and has a shocked look on her face.

The S&P/ASX 200 Index (ASX: XJO) is home to many varied businesses. Some are cyclical while others can be consistent and resilient. Amid ongoing fears of a recession, Domino’s Pizza Enterprises Ltd (ASX: DMP) shares could be one option during a possible economic downturn.

With strong inflation and higher interest rates, a recession certainly appears more likely than in the last couple of years.

Domino’s has grown into a global business. It holds the exclusive master franchise rights for the Domino’s brand and network in Australia, New Zealand, Belgium, France, the Netherlands, Japan, Germany, Luxembourg, Denmark, Malaysia, Singapore, and Taiwan. It’s also acquiring the Cambodia business. The Domino’s brand is owned by Domino’s Pizza Inc, a business listed in the US.

Over the past four months, the Domino’s share price has gained more than 35%. However, in the last year, it’s still down by around 30%. But, this means that it’s now at a lower valuation.

Expert view

The Motley Fool’s Scott Phillips was recently talking to Gemma Dale on the NABTrade podcast, Your Wealth.

He suggested that some ASX (200) shares could do well during a recession, including Domino’s. Phillips said the pizza company’s value range of food could be an attractive deal compared to eating out. As such, the company could be in a sweet spot in the “affordable luxury” space.

Phillips shared some wise advice that long-term winners are “really, really attractive”. If an investment can do moderately well for a really long time, it can compound and be successful.

Domino’s has long-term goals for growth. The company’s goal over the next three to five years is to achieve same-store sales growth of 3% to 6%.

It also has a goal to achieve organic store openings of 8% to 10% of the network annually in the next three to five years.

Certainly, combining same-store sales growth and growing its number of stores could lead to promising earnings growth.

Valuation of the Domino’s share price

Using the estimates on Commsec, the ASX 200 share could be valued at 40 times FY23’s estimated earnings.

But profit is expected to jump over the next two financial years.

In FY24, it could generate earnings per share (EPS) of $2.30, putting the Domino’s share price at 32 times FY24’s estimated earnings.

Then, in the 2025 financial year, it may be able to achieve EPS of $2.74. This would put the pizza business at 27 times FY25’s estimated earnings.

As we can see, the company’s forward price/earnings (P/E) ratio is expected to steadily reduce in the coming years.

The post The ASX 200 share that could thrive in a recession: Scott Phillips appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Domino’s Pizza Enterprises. The Motley Fool Australia has recommended Domino’s Pizza Enterprises. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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