Domino's downgraded to Sell

Domino’s shares have gained about a third since Domino's: Result, acquisition and offer on 15 Aug 13 (Hold – $11.82). Back then the stock was trading on a historic price-to-earnings ratio (PER) of 32, and that’s now up to 36, based on the 43 cents of earnings in 2013 (up 12%). Earnings growth of 24% and then 16% is tipped to bring this down to 29 and then 25 in 2014 and 2015, but this raises a conundrum always faced when investing in growth stocks – extrapolating long into the future can justify almost any PER – but many...

Domino’s shares have gained about a third since Domino's: Result, acquisition and offer on 15 Aug 13 (Hold – $11.82). Back then the stock was trading on a historic price-to-earnings ratio (PER) of 32, and that’s now up to 36, based on the 43 cents of earnings in 2013 (up 12%). Earnings growth of 24% and then 16% is tipped to bring this down to 29 and then 25 in 2014 and 2015, but this raises a conundrum always faced when investing in growth stocks – extrapolating long into the future can justify almost any PER – but many an investor has found that this can be a dangerous game, with retail roll-outs a good example of how growth can stop abruptly. Domino’s isn’t quite a retail roll-out, and Europe (and now Japan) are at relatively early stages, but a forward PER of 29 discounts a good deal of growth for quite a long time.

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