Shares in Domino’s Pizza (LSE: DOM) fell heavily in early trading this morning as the market struggled to digest the firm’s latest trading statement. Is this a great opportunity for new investors to build a position, or the beginning of a more sustained wobble for the stock?
Worth grabbing?
As updates go, this really was a mixed bag. Group sales rose 5.5% to a £339.5m in the 13 weeks to 30 December. As to be expected, the vast majority of this (just under £313m) came from the UK and ROI where like-for-like sales growth of 4.5% and 7.5%, respectively, were recorded in Q4.
Positively, Domino’s experienced its “busiest week ever” as Christmas approached, with the Friday before the big day “breaking all records” (12 pizzas were sold every second).
As an extra topping, the company reported “strong performance” online with sales increasing by 10.8% over the quarter.
Following these numbers (and motivated by the prediction that the UK’s delivered food market will grow at a compound rate of 8% to 2022), the company said its pipeline for store openings in 2019 would be “similar” to this year (59).
Unfortunately, the recent performance at home hasn’t been matched overseas, with Domino’s international businesses experiencing “growing pains” in 2018, according to CEO David Wild.
In addition to sales dipping 2% over the period (bringing in £26.6m), the mid-cap’s operations in Norway have been dogged by “integration challenges” and will require further investment.
As a result of these difficulties, underlying pre-tax profit for the full year is now predicted to be “at the lower end of the consensus range of £93.9m and £98.2m.” Talk of the company looking to merely “maintain” its market share was a bit disappointing too.
Valuation-wise, Domino’s was trading at 21 times forecast earnings before markets opened this morning. As such, it’s perhaps not surprising that some investors have chosen to depart.
Nevertheless, I’d be content to stay the course. It’s not a screaming buy just yet but, for those already involved, the dividends on offer should be sufficient compensation for any short term weakness, in my view. The predicted 9.51p per share total return for the year just ended gives a yield of 3.8%, based on a share price of 251p.
Just leaving
For evidence that stocks in this sector can bounce hard, take a look at the share price performance of takeaway portal Just Eat (LSE: JE). After a largely disappointing 2018, the stock has gained almost 40% in value over the last couple of months.
This hasn’t been enough to keep CEO Peter Plumb in his role, however, with the company announcing his departure with immediate effect earlier in the month after pressure from US activist investor Cat Rock Capital.
Board changes aside, Just Eat is still raking in the cash. The company now expects to report revenue of £780m and underlying earnings of £172m-£174m when it announces full-year numbers in early March. Revenue of £1bn-£1.1bn and underlying earnings of £185m-£205m in the new financial year have already been predicted.
That said, those thinking of investing now will need to have faith that interim CEO, Peter Duffy, can keep things on track while it searches for a replacement. A forecast price-to-earnings (P/E) ratio of 42 for 2019 is punchy, even for a company with huge opportunities to grow. Prospective owners must go in with their eyes wide open.
