Domino’s Pizza stock rating cut to Underweight at Barclays

On Tuesday, Barclays (LON:BARC) analysts downgraded Domino’s Pizza (NYSE:DPZ) Enterprises Ltd. (DOM:LN) (OTC: DPUKY) stock from Equalweight to Underweight, adjusting the price target to GBP2.50 from the previous GBP2.90. The stock, currently trading near its 52-week low according to InvestingPro data, appears slightly undervalued based on Fair Value analysis. The downgrade stems from concerns highlighted by the firm regarding the company’s performance and market position.

Barclays expressed reservations about Domino’s Pizza’s like-for-like (LFL) orders, noting a decline when compared to fiscal year 2019. This concern is supported by InvestingPro data showing a 2.25% revenue decline in the last twelve months, despite the company maintaining a healthy 48% gross profit margin. This observation suggests that the industry may have reached a point of maturity. Additionally, the company’s recent investments of approximately £7-9 million in a ’profitability and growth framework’ have been met with skepticism by Barclays. The firm acknowledges the necessity to support franchisee profits for a sustainable business model but emphasizes the need for evidence that top-line growth can be achieved without relying on company support.

The analysts also pointed out Domino’s Pizza’s inconsistent track record in meeting guidance, with ongoing downgrades to EBITDA during 2024 despite a boost from mergers and acquisitions, specifically the Shorecal deal. Furthermore, the potential introduction of a second brand to drive growth was mentioned as a concern, as it could lead to increased debt levels and may be perceived as a response to the maturation of the core business.

Barclays has recognized that Domino’s Pizza’s forward price-to-earnings (PE) ratio of 13 times for fiscal year 2025 does not appear expensive when compared to the historical average of around 17 times since 2020. The stock currently trades at a P/E of 11.89x and offers a 4.25% dividend yield, with a 26-year track record of consistent dividend payments. Investors awaiting more clarity might want to note that the company reports earnings in 10 days, according to InvestingPro, which offers additional insights through its comprehensive financial analysis tools. However, the firm asserts that without sustained LFL order growth and a solid track record of meeting earnings expectations, there seems to be no catalyst for a re-rating of the stock. Barclays warns that if further evidence of market maturity surfaces, consensus forecasts might overestimate the company’s future profitability, potentially leading to earnings per share (EPS) headwinds and a de-rating of the stock.

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