The expectation of meaty results from Domino's Pizza has usually boosted its share price in advance of the announcement (see table). And we believe that this year's first-half results, due on 23 July, may be another such opportunity for investors to trouser a quick profit.
- Share price motors ahead of results
- Effect of bad weather and sports events
- German potential not in share price
- Strong cash generation
- Growth rates sometimes dip
- Economic uncertainty
| Domino's Pizza share-price change in month before the day after half-year results | ||||
| 2011 | 2010 | 2009 | 2008 | 2007 |
| 27% | 10% | 22% | -14% | 13% |
True, 2011's results were, by the standards of Domino's, a bit disappointing, with the pace of like-for-like growth slipping. But there are reasons to expect that 2012's first-half figures for the pizza delivery specialist will show a much better picture, even though Domino's is trading against a depressed economic back cloth.
For starters, in 2012 Domino's comparative figures are much less demanding than usual. In 2011, the group was up against 2010's phenomenal 12 per cent like-for-like growth, which wasn't easy to beat. Thus it managed only 3 per cent like-for-like growth in that year and just 0.7 per cent in the second quarter. What's more, as well as facing easier comparisons, it's believed that this year's lousy spring and summer weather combined with this summer's sporting bonanza should help boost sales as couch potatoes hunker down.
| Domino's Pizza (DOM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 493p | MARKET VALUE: | £797m | |
| TOUCH: | 492-493p | 12-MONTH HIGH: | 526p | LOW: 393p |
| DIVIDEND YIELD: | 2.9% | PE RATIO: | 23 | |
| NET ASSET VALUE: | 36p | NET DEBT: | 54% | |
| Year to 25 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 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 | 210 | 38.8 | 16.7 | 12.3 |
| 2012* | 238 | 46.5 | 21.0 | 14.1 |
| % change | +13 | – | – | +15 |
Normal market size: 5,000 Matched bargain trading Beta: 0.9 *Numis forecasts (profits and earnings are not comparable with historic figures) | ||||
There are other advantages the group has in 2012 compared with 2011. The rise in VAT has worked its way through the system, for example, and food-cost inflation will also be lower.
True, like-for-like sales growth is particularly important for Domino's because of the disproportionately large effect of marginal sales on profits. However, Domino's growth is about more than just its like-for-likes. Indeed, broker Numis believes that Domino's is capable of compounding its earnings by 17.5 per cent a year in the long run, while 'only' raising its like-for-like sales at the annual rate of 3 per cent.
Management has invested heavily in UK infrastructure, and new stores opening via its franchise model are likely to continue apace - this year 72 openings are expected. That's encouraging because last year revenues from newly opened outlets were 20 per cent ahead of expectations. In addition, the group is investing in its German joint venture. While profits from Germany are not expected until 2015, the potential for this operation should start to feature in investors' thinking. However, Numis thinks that there is no value for Germany in the share price, yet calculates that the figure should be 69p a share.
Another attraction is the ability of Domino's to produce cash. While many businesses could only achieve the growth rates that the pizza group reports by mortgaging themselves to the hilt, Domino's has a sound balance sheet. And its record of dividend growth is enviable - the payout has compounded at 32 per cent over the past five years and the company is currently buying back shares.
