The FTSE 100 is trading close to record highs. But the mid-cap FTSE 250 has not yet recovered fully from last year’s slide. It’s here I want to start today, with a classic growth stock that’s currently out of favour.
Reliable delivery
Takeaway giant Domino’s Pizza Group (LSE: DOM) now has 1,106 stores across the UK. The firm’s widespread reach has helped make it very successful — the shares have risen by 255% over the last 10 years.
However, this investor favourite is facing headwinds as it tries to continue expanding. Domino’s shares have fallen by about 35% over the last year. Although future growth may be slower, I believe this could be a good opportunity to buy into a reliable long-term performer.
The firm’s latest trading figures show that UK and Ireland sales rose by 4.8% to £299.3m during the first quarter, while like-for-like sales were 3.1% higher in the UK and 6.8% higher in Ireland. Online orders now account for more than 80% of all sales.
What’s the problem?
Domino’s franchisees — who own and run the stores — appear to be resisting the firm’s attempts to open new stores.
The franchise system works by allocating each store a territory within which it’s the only Domino’s. But in order to keep expanding, the company wants to split these territories into smaller areas so that it can open more stores.
According to press reports, franchisees are pushing back against these plans, fearing that their returns will fall.
The other problem facing the firm is that its efforts to expand into Europe are not going well. International sales fell by 2% during the first quarter and the company says that it now expects a loss from its overseas operations this year.
It looks to me like the company might close down some of its overseas operations if things don’t improve soon, but that wouldn’t bother me. I see the mature UK market as a great source of reliable cash and steady growth.
I’m confident the firm will reach a new deal with its franchisees. In the meantime, Domino’s shares look cheap to me on 11 times forecast earnings, with a 4.1% dividend yield. I’d buy.
Plain sailing
Another successful growth business that looks good value to me at the moment is FTSE 100 cruise ship operator Carnival (LSE: CCL). It’s the biggest company of its kind in the world, with brands including P&O Cruises, Cunard, Holland America and Princess Cruises.
Trading at about £40, Carnival shares have fallen by about 25% from the highs seen in 2017. Although the company is facing some pressure on costs due to higher fuel prices and exchange rates, growth is continuing and analysts expect earnings to rise by 5% this year.
At the end of March, the firm said that advanced bookings for 2019 were ahead of the same point last year, with comparable pricing. This has been achieved despite the group adding new ships this year, suggesting that customer demand is still growing fast.
Although there’s a risk that cruise ship operators will end up with too much capacity at some point, as yet there’s no sign of this. Carnival’s role as the largest player in this sector makes it a good long-term bet in my view. With the shares trading on 11 times 2019 forecast earnings and offering a 3.9% yield, I think now could be a good time to buy more.
