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Domino's fall

It’s been a long time since this stock has broken below any meaningful chart support. However, it’s reached an interesting stage now.

Domino’s Pizza (DMP: ASX) is trading around $71 today, down from a peak of $80.69 about a month ago. It’s Forward Price: Earnings multiple has also been falling steadily.  It peaked at around 69 times earnings in May but is now down to (a still stellar) 51 times.

All this sees the share price testing the support of a steep trend channel. If we are going to see a deeper global stock market correction in coming weeks, market darling stocks like Domino's might be a bit vulnerable.

Domino's is certainly a great growth story and one of the Australian stock market's major success stories in recent years. Analysts' forecasts are for earnings per share to grow by around 30%pa over the next 2 years. Domino's itself, has provided guidance for profit growth in the region of 30%+ for F2017.

This growth profile has a number of drivers. Domino's is famous for using technology to increase productivity and improve customer satisfaction. It is, for example, currently developing a robot for pizza deliveries.

However, perhaps the key growth driver is Domino's ability to keep adding to the number of pizza outlets, especially now that it is operating in Europe and Japan. It had just under 2000 stores at the end of last financial year and is planning to add between 175 and 195 this year. This phase of being able to rapidly add to outlets is often the sweet spot for growth stocks; think JB Hi-Fi and Ramsey Health Care for example. Domino's is forecast to be in this position for some years yet. 

For many conservative investors, the key question is  how much they are prepared to pay for this growth potential. 

 If Domino’s does happen to break support, those waiting patiently to buy into this growth story might just be rewarded with an opportunity to buy at more conservative levels.  Possibilities might include the 50% retracement and 200 day moving average around $64.50 or the 61.8% retracement and previous highs around $61. The latter would represent a forward PE multiple of around 44 times forward earnings - still high but better than 69 times!



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