Domino's Pizza UK & Ireland (DOM)

Domino's Pizza's shares seem to be as popular as its pizzas. Shares in the franchisor of the largest pizza delivery chain in the British Isles have risen by 25 per cent since the turn of the year. As a result, they are now rated at 23 times forecast earnings. Even so, they should have further to run.

First, Domino's should benefit from cuts in discretionary spending in the UK. Instead of eating out, beleaguered consumers will have to make do with a home-delivered pizza at a fraction of restaurant prices.

That said, Domino's sales won't be immune to economic downturn. Its revenues stayed flat during the last consumer-led recession of the early 1990s. But these masked contrasting performances. Some parlours in central London were generating double-digit sales growth, while management had to close outlets in out-of-town areas. Back then, however, Domino's was much smaller and this time the group should be in a stronger position to weather the downturn.

Click for a guide to the terms used in IC results tables.

Second, the group appears unscathed by issues that are taking a bite out of its competitors' profit margins. Rental costs, for instance, are on the rise for most high-street restaurant operators. But Domino's outlets are designed only for preparing foods and are generally situated in off-pitch locations where these pressures are minimal. Food-price inflation is also a problem for the sector. But through clever price promotions - such as three or more 9.5 inches pizzas for £5.55 each - its franchisees have been able to recover higher wheat and cheese costs discretely. Indeed, this equates to an 11 per cent price rise, since these pizzas were previously charged at £5 each.

Third, the company continues to grow. Indeed, Domino's aims to double the size of its estate as it sees room for 1,000 outlets by 2017. And the company should not have difficulties finding franchisees to meet its ambitions. That's because it favours franchisees who have already demonstrated their ability to grow their operations. Currently franchisees, on average, own 3.5 shops and the target is to raise the average to five shops over the next 10 years. New applicants should not struggle to raise funds either. Indeed, banks are keen to lend since a Domino's outlet generates enough cash for most franchisees to recoup their investments within two years.

Against this backdrop, finance director Lee Ginsberg is confident Domino's plans will help to lift margins. The aim is to keep the annual rise in overheads to 7 per cent a year while sales rise by 15 per cent. And Domino's is also flexing its marketing muscles with the sponsorship of Britain's got Talent, ITV's hugely successful talent show whose viewing figures topped 10m. This should boost sales as there is a direct connection between order volumes and advertising.

Domino's is also expanding rapidly in online where customers tend to place larger orders. This also improves productivity as internet sales free franchisees from the hassle of telephone orders.

That said, holding shares in Domino's has its risks. The most prominent is damage to its brand. That could be caused by a food scare or malpractices from franchisees that tarnished the group's reputation. And Domino's operates in a highly competitive area. Consumers have plenty of choice and any restaurant can easily hire a delivery man. Yet given the scale of Domino's operation and its keen prices, smaller players might struggle to compete profitably.