These quality shares now trade on appealing valuations. Time to buy?

Don’t bet against these two quality stocks, says Paul Summers.

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Thanks to recent falls, the shares of some high-quality companies are now starting to look fairly cheap relative to their historic valuations. Here are just a couple that have caught my eye.

Undervalued?

I’m not sure how much longer I can put off investing in small-cap design and engineering group Avon Rubber (LSE: AVON), particularly given after last month’s interim results underlined just how well the company is performing.

To recap, revenue and operating profits increased by 22% (£90.7m) and 21% (£10.9m) respectively over the six months to the end of March, albeit boosted by favourable foreign exchange rates. At £17m, underlying cash from operations was 16% higher than over the same period in the previous financial year. The outlook for the company’s two divisions — Protection and Dairy — also remains positive, with the former benefitting from a recent contract win to supply roughly 37,000 respirators and accessories to an “unnamed customer“. This, according to CEO Paul McDonald, reflects the company’s “further expansion into foreign military markets”.

At 16 times predicted earnings for 2017, geographically diversified Avon is good value in my opinion, particularly as its valuation has been a lot higher in the past. Assuming EPS growth forecasts are hit, this number drops to 15 in 2018.

With £12.6m in net cash (compared to the £8.4m debt figure recorded by the firm in March 2016), it boasts a suitably robust balance sheet. Its ability to generate excellent levels of free cashflow has led to 20%+ annual hikes to the dividend for many years now (with a 30% increase to the interim payout being announced in May). 

Solid results, confident management and great fundamentals — am I missing something?

Time to grab a slice?

Domino’s Pizza (LSE: DOM) is consistently cited as having all the hallmarks of a quality business: exceptional returns on capital, a bulletproof balance sheet and decent cashflow.

Since hitting a high of 396p last August however, shares in the Milton Keynes-based company have fallen heavily. The reason? It all seems to be down to expectations.

The slide began in March when the company announced that UK sales growth had slowed to 7.5% in 2016 — down from 11.7% the year before. While disappointing, the 12% fall on the day felt like an overaction when there was still plenty for shareholders to be happy about. In addition to opening 81 new stores over the year, the £1.4bn cap was continuing to see the fruits of its investment in its UK digital offering with 72% of system sales coming from online (a rise of 21% year-on-year). Its international operations were also doing well, with both the Republic of Ireland and Switzerland delivering solid year-on-year growth. 

Unfortunately, the lack of a swift reversal in UK trading since the start of the new financial year has led analysts to revise their earnings estimates and heap more pressure on the share price. 

Is Domino’s doomed? Of course not. A slowing of growth is nothing to celebrate but I see this as simply a temporary blip and share CEO David Wild’s confidence in the “resilience and long-term potential” of the company’s business model. 

With its growing international footprint and market-leading position, I regard Domino’s as a great buy at the current price, even if a valuation of 19 times earning for 2017 (reducing to 17 in 2018) might still be regarded as too expensive by some.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Domino's Pizza. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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