BULL POINTS:
■ Sales comparisons set to get easier
■ Simple and successful business model
■ Proft margins rising
■ First-half results could be a catalyst
BEAR POINTS:
■ Weak Irish economy
■ Costs of expanding in Germany
You know what the song says: "You always hurt the one you love". And that's how it has been between the stock market and shares in Domino's Pizza this year. In January, the price of this stock-market darling was riding high at 591p and the rating was over 30 times forecast earnings. Since then the price has plummeted by as much as 37 per cent (currently it's off 30 per cent) as fickle investors head for the exit.
| IC TIP RATING | |
|---|---|
| Tip style | Speculative |
| Risk rating | High |
| Timescale | Short term |
| What do these mean? Find out in our | |
While the shares may have been overvalued at their peak, the underlying growth story that fuelled the love affair remains intact. The key concern recently has been like-for-like sales growth. The shares began to weaken in February when the company's bosses said that like-for-like growth was "only" 4.7 per cent in the first seven weeks of 2011. The decline accelerated on news that first quarter like-for-like growth was 4.2 per cent.
Yet the slowdown in growth at the group's 608 established stores needs to be seen in the context of the particularly strong trading last year. Like-for-like growth was ahead by 10.5 per cent in the first quarter of 2010 and comparatives for the second quarter are even tougher with 17 per cent like-for-like growth. This year has been made tougher by the unseasonably warm spring, so comparative sales could even drop in the second quarter. Happily, the comparative figures get easier in the second half, and already the shares have begun to rebound off recent lows in the run-up to the first half results, due on 25 July.
| DOMINO'S PIZZA UK & IRELAND (DOM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 413p | MARKET VALUE: | £669m | |
| TOUCH: | 412-413p | 12-MONTH HIGH/LOW: | 591p | 372p |
| DIVIDEND YIELD: | 3.0% | PE RATIO: | 21 | |
| NET ASSET VALUE: | 26p | NET CASH: | 32% | |
| Year to end Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2007 | 115 | 18.6 | 8.4 | 4.4 |
| 2008 | 136 | 22.1 | 10.1 | 5.9 |
| 2009 | 155 | 41.0 | 21.5 | 7.8 |
| 2010 | 188 | 35.2 | 15.4 | 10.2 |
| 2011* | 202 | 42.1 | 19.3 | 12.2 |
| % change | +7 | +20 | +25 | +20 |
Normal market size: 3,000 Matched Bargain Trading Beta: 0.7 *Liberum Capital forecasts | ||||
While last year's strong trading - buoyed by favourable weather, football's World Cup and successful promotions - is the major reason for the sluggish performance, the dire state of the Irish economy has taken its toll. Sales in the Republic of Ireland accounted for 7.4 per cent of the total in the first quarter and were down 10.5 per cent like-for-like.
However, arguably investors have forgotton the major attraction of Domino's - its ability to grow cheaply via its franchise model. City analyts reckon that only about £30m will be needed to get the group to its target of 1,200 stores by 2020 from 672 at the end of March.
This year, most new openings will be in the second half, which should help build confidence for prospects in 2012. What's more, economies of scale created from expansion should continue to improve profit margins. Investment in a new dough-making factory should boost efficiency, and the share price could motor if investors get a hint from the first-half report that management's target to widen the margin by 0.4 of a percentage point every year could be exceeded.
Domino's has also just moved into Germany, with the purchase of a 75 per cent stake in the master franchisee for the region. This could prove an exciting medium-term opportunity, with the target of setting up 400 stores over 10 years. That said, initial set up costs are likely to trim profits and earnings until 2013.
