Domino’s Pizza investors are shrugging off inflation fears

Why are Domino’s Pizza Enterprises (ASX:DMP) shares up over 10% since Wednesday? There’s no news out of the company, but we suspect the latest inflation data might have something to do with it.

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Domino’s Pizza Enterprises investors fear inflation

Domino’s Pizza Enterprises shares have lost nearly two thirds of their value since all time highs of $160 last September. Investors fear that as inflation rises, people will cut back on fast-food spending, even though fast food has historically outperformed amidst inflation (both in company sales and share prices).

But in recent weeks, there has been evidence that inflation may be moderating. US inflation is still at a 4-decade high at 8.2%, but does not appear to be rising much further. Australia’s most recent data was in July where inflation was 6.1% in the June quarter. Given shares have come down so much, investors believe there is a lot of upside left in it and think this week was the time to get in.  

Dominos Pizza Enterprises (ASX:DMP) share price chart (Graph: TradingView)

If inflation is moderating, is the company a buy now?

If Domino’s Pizza executes its long-term growth strategy, we also think there is significant upside. Our modelling shows that with store opening targets and the company’s forecasted sales growth, shares could be worth over $90.

But investors should remember that it is too early to say that inflation is under control and either way, there are other risks and sentimental factors that will weigh on the share price. These include currency fluctuations, supply chain issues and labour shortages.

You also have to remember that Domino’s Pizza is now active in 13 countries, each with different inflation rates and varying local economies, and the US is not one of them. So, even though we think this business has upside, we don’t think this week’s rise was justified.

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