Broker snap: Canaccord upgrades Domino's, but concerns remain

8th Jan 2014 10:35

Canaccord Genuity has lifted its recommendation for pizza delivery chain Domino's Pizza from 'sell' to 'hold' after a stronger sales performance in the fourth quarter.The target price for the stock has been raised from 480p to 500p.However, analyst Wayne Brown still voiced some concerns with the business, including the recent departure of Domino's Chief Executive Officer and Finance Director in quick succession, as well as ongoing losses in Germany.Meanwhile, he said that "an achievable rate of new openings needs to be targeted instead of 'missing' guidance"."Moreover, with so much senior management change we feel confidence around retention and operational management depth needs to be provided to ensure all aspects of the group are strong and well invested," Brown said.As for fourth-quarter trading, Canaccord Genuity commented that Domino's delivered a strong performance in the UK and Ireland with like-for-like sales up 10.9% and 7.6%, respectively. Brown said: "The combination of favourable weather conditions, the timing of Christmas and Boxing Day and the group's up-weighting of digital marketing activity have been key drivers for such a strong performance. "However, we are not changing forecasts as losses in Germany are again surprising on the upside. The reason for this is the later-than-expected transfer of corporate stores to franchisees."He said that a price-to-earnings ratio of 20 - down from 27 when Canaccord moved to a 'sell' rating - is now appropriate for a 'hold'.The analyst called for an increase in free cash flow, a return in upgrade momentum and share buybacks, and a more stable management structure before he will turn more positive on the stock.The stock was 1.39% higher at 510p by 10:50 on Wednesday.BC