Gamble of the week: A risky punt on pizza

When reviewing this company in July, I thought it was a great business, but way too expensive on 26 times earnings, leaving no room for slip-ups. That proved to be the case. The shares are now down 25% after a tough few months.

On the trading front, it seems that replicating the success of its UK business in Germany is not going to happen quickly, if at all. It will take longer than expected for losses to turn into profits.

Back in Britain, analysts are starting to fret that it won’t be able to open as many new stores as they had expected. When that gets factored into their spreadsheet models, it probably means the business is worth less too.

Domino’s Pizza

Domino's Pizza share price chart

If that wasn’t bad enough, last week the chief executive said he was leaving. Coming so quickly after the finance director said he was retiring, this did not sit well with investors, who unsurprisingly wondered: ‘what have they seen that outsiders haven’t?’ Investors hate uncertainty, which is why the shares have been hammered.

Analysts are not yet taking a knife to their forecasts. They still expect earnings to grow by 20% in 2014. If Domino’s can deliver on that, the shares trade on a less punchy 17.4 times forward earnings and offer a prospective dividend yield of 3.8%.

The chairman, Stephen Hemsley, who ran Domino’s for a decade, is apparently ready to step in to steady the ship.

Time will tell whether Domino’s can keep on growing strongly, but sometimes the market overreacts to news. Domino’s shares could bounce back if some confidence is restored. The shares are a risky, short-term punt.

• See my article on Domino’s from July here

Verdict: a speculative buy