Calling the top on Domino's Pizza

James Greenhalgh called it a few weeks ago at $72.45 in Domino's Pizza: Absurdly overpriced, a mere 944 days and 563% since I tried the same in the more prosaically titled Domino's downgraded to Sell back in 2013.

Domino's Pizza is a graveyard of top callers and today's full-year result showed why. Underlying earnings per share (EPS) rose 41% to 105 cents (a couple of cents above consensus estimates as is mandatory for any true stock market darling). Over the next couple of years EPS is forecast to grow by a more modest 30% a year (or so) and you don't need many more years of that to bring any price-earnings ratio back into line.

Five years, for example, would knock a PER down by around 73% – taking Domino's 2021 PER to a more respectable 19 times. On that basis you might say the next five years' earnings growth is baked in. But what if EPS carried on growing at 30% for another five years? Well the PER would come down to a bit over 5 and you'd have a truly cheap stock.

Or would you? One problem for Domino's is that its master franchise agreements run until 2028 in Australia and New Zealand and 2031 in Europe. At that point the US-based Domino's Pizza International will get to decide how much to charge the local Domino's for continued use of the brand. It seems highly unlikely that they'd offer it to anyone else, but there's surely a fair chance they'd want to charge a bit more for it.

Of course neither James nor I are actually calling the top for Domino's. We've no idea where the price will go from here (my article back in 2013 is ample proof of that). We are, though, saying that you need to be very careful when paying monster PERs for stocks and justifying it with massive earnings growth long into the future. There's a graveyard for that as well.