Broker snap: Credit Suisse ups Domino´s Pizza to 'outperform'

31st Jan 2014 11:03

Shares of Domino´s Pizza were substantially undervalued versus its peers using the traditional metrics of fundamental analysis. That was the conclusion of the 'number crunchers' over at Credit Suisse, according to research distributed to clients on Friday. They began by explaining to them how the stock has suffered a 31% de-rating since January 2011 in comparison to the 34% re-rating seen by its 'quality growth' peer group. That had happened despite the fact that, in their view, the company was delivering balanced and sustainable growth in UK/Ireland whilst the firm´s German operations were now "inmaterial".Plugging in their forecasts for the different key financial variables into their spreadsheets they found that the resulting price target was now 620p, which they duly raised from their previous estimate of 535p. That came despite the use of what they said were conservative assumptions. For example, their models for the company are based on a growth rate in like-for-like sales in 2014 and beyond of 3%. The company, however, managed to get this metric up to 6% in the UK in 2012/13, versus 3% in 2011. To drive home their point regarding Germany they highlighted that if had they assumed no profit growth in that country then their estimate of the discounted value of Domino´s cash flows would only have been trimmed by 2%. Some of the key inputs into their discounted cash flow (DCF) model for the company were: Weighted Average Cost of Capital: 9.4%, terminal growth rate assumption: 2%; medium-term rate of growth in like-for-like sales: 3%; terminal rate for margins: 21.9%.The corresponding values under their "blue-sky" scenario would be as follows they said: Weighted Average Cost of Capital: 9.4%, terminal growth rate assumption: 2%; medium-term rate of growth in like-for-like sales: 4%; terminal rate for margins: 23.9%. That would yield a price target of 714p.Lastly, to back-up their DCF calculations they provided an analysis based on a comparison of the company´s financial ratios (by their estimates) as compared with its peers. More specifically, they opted to use the price-to-earnings growth multiple, which in Domino´s case came in at 1.2 times, versus 1.8 for comparable firms. As a result of all of the above their recommendation on the stock was upped to 'outperform' from 'neutral'.AB