What happened to the DMP share price?
Today, Domino’s Pizza Enterprises Ltd [ASX:DMP] was down marginally. The entire Aussie market declined following weak sessions in the US and in Europe.
Energy has been weaker in recent days, which has had a depressing effect on equity markets as a whole.
Why did Domino’s Pizza shares do this?
Domino’s Pizza Enterprises has been on my watchlist for some time. It has been one of the best-performing momentum stocks in the ASX100. The long term price trend of DMP looks exceptional, and it has delivered a mouth-watering 80% in the last 12 months.
As a momentum stock, DMP works well. However, it’s more than that. It’s a fundamentally healthy stock. The market sees a higher level of revenue and earnings for the company in the next year, which provides the potential basis for more positive gains in its stock price. The company is liquid and has a low level of debt; these are great financial health factors.
The main concern surrounding the stock is its valuation and margin. For a value investor, the company’s high valuation needs to be clearly justified for further investment. This, given the ongoing threat from rising labour costs, should alert potential investors. If rising costs depress margins and earnings, it would be a negative piece of news for the stock.
What now for DMP?
However, I argue rising labour costs and the associated effect on earnings could be much more tempered than is feared. While I believe the threat from rising costs is very real, the upside in the stock price can still be sustained.
There are at least two reasons. One, earnings may not be impacted to the extent that we fear. Second, the momentum of the stock can carry it upward for some time. I think both are very possible outcomes.
But it has to be said, momentum does run out of steam eventually, and the valuation of the company can become less attractive. When those things happen, the price of the company can correct downward.
This is why my recommendation to investors who are entering now is to be nimble in their DMP trade.
Analyst, Emerging Trends Trader