Is Domino’s an Undervalued Gem Worth Buying?

Domino's recently faced lawsuits over alleged underpayment of workers and withholding company information, so are we witnessing the end of the good times for this once-celebrated ASX stock, or are we on the brink of a unique opportunity to acquire an undervalued gem at a discount?

What makes Domino’s an interesting case is that prior to the end of 2021, its share price was soaring, peaking at $167. Since then, it has nosedived by more than 75 per cent, prompting questions about whether this sharp decline is warranted.

What should you consider when analysing Domino’s

First up is Domino's recent financial performance, which presents a mixed picture. Revenue increased by 11 per cent to $1.27 billion, which is encouraging, but profits dropped by 19 per cent, settling at $57.8 million. This decrease in profit, despite higher sales, is largely due to rising costs and strategic decisions including exiting the Danish market.

On a brighter note, Domino's is expanding into new markets in Asia, positioning itself for future growth. The company is also heavily investing in new technology to improve its delivery and logistics and increase the company's overall efficiency.

Turning to the share price, the current drop to a significant long-term support level of $40 is intriguing to say the least. The last time Domino's fell to this level was during 2018-19, after which it saw its share price rise by over 300 per cent. This historical precedent makes the current share price particularly appealing, however, since the stock has yet to show clear signs of a rebound, I would like to see confirmation that buyers are willing to drive the price higher before becoming too optimistic about Domino's future.

So, if the company can resolve the recent lawsuits causing concern, Domino's strategic initiatives and the historical support level suggest there is potential for recovery and growth. Therefore, I encourage you to carefully consider these factors and monitor the share price closely for indications of a recovery. If such signs emerge, then we might indeed be looking at an undervalued gem at a discount.

What were the best and worst-performing sectors last week?

The best-performing sectors included Consumer Discretionary, up 0.36 per cent, followed by Information Technology, up 0.14 per cent and Health Care, slightly down 0.17 per cent. The worst-performing sectors included Materials, down 4.28 per cent, followed by Utilities, down 2.64 per cent and Industrials, down 2.44 per cent.

The best performing stocks in the ASX top 100 included JB Hi-fi, up 5.70 per cent, followed by Pro Medicus, up 4.21 per cent and James Hardie Industries, up 4.01 per cent. The worst-performing stocks included Arcadium Lithium, down 15.40 per cent, followed by ASX Limited, down 12.24 per cent, and IGO Limited, down 12.08 per cent.

What's next for the Australian stock market?

What a difference a week makes. The All Ordinaries Index fell over 2 per cent last week, erasing the gains from the previous week. Interestingly, over the past four weeks a pattern has emerged where the efforts of both the buyers and sellers have reversed the following week. These reversals have resulted in a sideways market movement with no side really maintaining dominance for any extended period. This price action might seem unremarkable, but I find it exciting because the longer the market consolidates, the stronger the eventual breakout.

In last week’s report, my target for the expected rise was between 8,200 to 8,400 points, but if the market holds steady in this sideways movement for the remainder of June, this will add strength to the rise I am expecting. Given this, I believe a target of 8,600 points and beyond is likely, once the market finally breaks out.

My excitement for the next rise is enhanced, given the market is pausing above the 7,900 level, which is a significant level that I have highlighted previously. To be specific, 7,956 was a previous all-time high, and, therefore, the fact that the All Ordinaries Index is holding above a previous all-time high signals strength. This is also confirmed, as June is normally a month traditionally marked by declines for the All Ordinaries Index. However, to date, we have not seen a significant drop in price.

This resilience reinforces my view that strong buying activity is still dominating the market. A point to note is that we are approaching the second round of dividend payments in the next couple of months. This typically spurs more buying from those looking to capture the final payment for the year. The current pause in the market suggests the bulls are taking a breather before their next charge.

That said, we always need to be prepared for the opposite to occur, as such if the market falls to break below 7,866 points, this will be the first warning of further falls to come. Regardless of the direction, the next move will be strong, so be prepared to act if need be and and to do it quickly.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.