Domino’s share price drops 5% on bearish broker note

The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price is not delivering the goods on Monday.

In afternoon trade, the pizza chain operator’s shares are down 5% to $71.95.

Why is the Domino’s share price falling?

Investors have been selling down the Domino’s share price on Monday after the company was the subject of a bearish broker note out of Goldman Sachs.

According to the note, the broker has downgraded the pizza chain operator’s shares to a sell rating and cut the price target on them by 34% to $59.20.

This implies potential downside of almost 18% based on the current Domino’s share price.

What did the broker say?

The broker made the move on the belief that the company will fall short of consensus earnings estimates. Goldman explained:

We believe that consensus remains too high, and we see further downside, specifically from lower earnings in Japan and Europe due to lower store growth and not being able to fully pass through cost-inflation.

We believe this high inflationary environment will impact DMP in two ways. Firstly, it will push out the franchisee payback period, especially for split stores, where its store economics, were already fragile. […] Secondly, for EBITDA margin, we expect that Japan will see the highest erosion, back to pre-COVID levels given sales/store dilution due to normalization of orders post COVID and high cost inflation that may not be fully passed on.

In light of this, Goldman is forecasting Domino’s to deliver earnings growth well short of consensus estimates.

We now forecast a DMP sales CAGR and NPAT CAGR from FY22-24e to be 9.5% and 5.4% respectively and our EPS forecasts are 10%/19%/27% below FactSet consensus for FY22-24e inclusive due to both our lower sales and margins expectations.

The post Domino’s share price drops 5% on bearish broker note appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Dominos Pizza Enterprises Limited. 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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