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Is Domino’s Pizza Group plc a falling knife to catch after crashing 15%?

Image: Domino's Pizza. Fair use

Domino’s Pizza (LSE: DOM) is one of the biggest fallers among UK shares today. Its shares are currently down over 10% after the release of its 2016 results. Could this be an opportunity for long-term investors to buy in at a severely discounted price?

Strong growth

Domino’s Pizza recorded a rise in system sales of 14.5% in 2016, which helped to push its underlying pre-tax profit 17.1% higher. In the UK, sales grew by 14%, with like-for-like sales 7.5% higher and the opening of 81 new stores having a positive impact on the company’s performance. The digitisation of the business continues to make encouraging progress, with online now representing 72% of system sales. This is a 21% rise on last year and with mobile representing 73% of digital sales, the company’s investment in technology is bearing fruit.

Strong growth was also recorded outside of the UK, with the conversion of acquired Joey’s stores in Germany completed six months ahead of schedule. In Ireland, there was 10% year-on-year growth in local currency, while in Switzerland Domino’s recorded a 21% rise in sales. The company also announced the acquisition of the third largest pizza chain in Norway, Dolly Dimples, today. This could help to further improve its growth prospects.

Capital growth potential

In 2017 and 2018, Domino’s is expected to record a rise in its earnings of 14% and 11% respectively. That’s despite making a worse start to 2017 than the end of last year, with UK LFL sales growth being 3.9% so far this year versus 4.8% growth in the final quarter of 2016. Due partly to this, its shares have fallen by over 10% today. However, its growth potential appears to be relatively resilient. Evidence of this can be seen in the company’s track record of growth, with double-digit growth reported in the last four years on an annualised basis.

Therefore, the company seems to offer a relatively robust growth outlook. This could become more popular among investors if uncertainty regarding the UK economic outlook builds as negotiations between the UK and EU commence.

Sector appeal

After today’s share price fall, Domino’s now trades on a price-to-earnings growth (PEG) ratio of two. While this is not particularly attractive, the company’s high probability of delivering on its forecasts means that it may be worthy of a premium compared to sector peers such as Just Eat (LSE: JE). It is expected to record a rise in its bottom line of 32% this year and 39% next year. Clearly, this is far superior to Domino’s growth outlook, and with Just Eat trading on a PEG ratio of 1.3 it seems to offer greater upside potential.

Certainly, Just Eat appears to have a bright future. It is adopting a similar business model to Domino’s, in terms of investing heavily in technology, the customer experience and in acquiring other businesses. Its shares appear to be a worthwhile investment, but since Domino’s has a strong position in established markets and the financial strength to survive any potential slowdown in consumer spending this year, it could prove to be the better buy based on its lower risk profile.

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Peter Stephens owns shares of Domino's Pizza. The Motley Fool UK has recommended Domino's Pizza and Just Eat. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.