This FTSE 250 growth stock just tanked despite posting higher profit. What’s going on?

The Domino’s Pizza share price has dropped like a stone in early trading. Paul Summers takes a closer look at the FTSE 250 firm’s results to find out why.

| More on:

Image source: Domino's Pizza Group plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s been a rough start to the day for holders of FTSE 250 member Domino’s Pizza (LSE: DOM) with its shares tumbling over 11% in the first hour of trading.

What makes this interesting for me is that today’s (11 March) full-year numbers were hardly a disaster.

Sales and profits up

Let’s start with the good news. Sales rose to £1.54bn in the 52 weeks to 24 December 2023. This pushed revenue for the year up just over 11% to £667m and ultimately allowed Domino’s to report a small increase in underlying pre-tax profit.

So, what’s the problem? Well, today’s share price drop seems to be motivated by a rather lacklustre start to 2024.

Having experienced a “slow January” in terms of trading, the firm said that orders and like-for-like sales growth would now be lower in Q1 than over the same period in 2023.

On the flip side, management still expects to deliver growth over the course of the year and for underlying earnings to come in with analysts’ current projections. Ongoing food cost deflation should also give margins a boost.

So is today’s tumble a good opportunity for me to get involved? Let’s check the valuation.

Reasonably priced

Prior to this morning’s fall, the shares were changing hands for 17 times forecast earnings. That’s not exactly cheap but nor is it screamingly expensive.

There’s also a dividend yield of over 3% on offer. That’s fairly average among UK stocks but it does look like it will be easily covered by profit. The same can’t be said for some of its index peers.

The question is whether today’s price action is a blip.

Quality stock

I think it might be. Assuming the cost-of-living crisis begins to ease over the coming months, the willingness of people to open their wallets and order food in should bounce back.

Looking ahead, there’s certainly no shortage of big events that one imagines could help business. These include Euro 2024, the Paris Olympics and (the inexplicably popular) Eurovision.

On a more fundamental level, Domino’s consistently posts high returns on capital compared to the market average. This means it makes a lot of money relative to the investment it puts in. Operating margins are also high for the consumer cyclicals sector. It’s delicious ‘quality’ hallmarks like these that I look for when scanning the market for stocks to buy.

Of course, a blazingly hot summer could push people out of their homes for longer than expected. And, yes, UK teams and athletes could exit the aforementioned sporting events earlier than predicted. So a swift recovery isn’t nailed on.

While delivering brilliantly for investors over the very long term — our favourite time horizon at Fool UK — there’s also been quite a bit of volatility in the share price on the way.

Drop overdone

As trading days go, I can understand why this may be one that investors want to forget. However, the negative reaction does feel excessive if it’s assumed that things improve as we move through 2024. There are no guarantees but I suspect they will.

If I didn’t already hold stock in another company in the takeaway food space — baked goods retailer Greggs — I’d consider buying a small slice of Domino’s today and building a position at the months pass.

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 owns shares in Greggs Plc. The Motley Fool UK has recommended Domino's Pizza Group Plc and Greggs Plc. 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.

More on Investing Articles

Bronze bull and bear figurines
Investing Articles

1 dividend superstar I’d buy over Lloyds shares right now

I sold my Lloyds shares recently and have used some of the proceeds to buy more of this high-yielding dividend…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£20,000 in savings? Here’s how I’d try to turn that into a £43,960 annual passive income!

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends can generate significant passive income over time.

Read more »

Sun setting over a traditional British neighbourhood.
Investing Articles

Could I make shedloads of dividend income from 8,025 Kingfisher shares?

Some shares are better than others when it comes to earning dividend income. So how does this FTSE 100 do-it-yourself…

Read more »

Illustration of flames over a black background
Investing Articles

Are Thungela Resources shares brilliant for passive income?

There’s one share that’s recently been an excellent source of passive income. But ethical investors won’t want to touch the…

Read more »

Edinburgh Cityscape with fireworks over The Castle and Balmoral Clock Tower
Investing Articles

1 growth stock to consider buying at $1 that could be the next Nvidia

Attempting to find the next great growth stock may be like searching for a needle in a haystack. Still, here's…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Should I buy these UK shares for my portfolio?

This Fool has been searching for ways to capitalise on the commodity moves via UK shares. Here’s what he’s watching.

Read more »

Illustration of flames over a black background
Investing Articles

Just released: April’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£9,000 in savings? Here’s a FTSE 100 stock I’d buy to target a £30,652 annual second income!

Our writer highlights one top FTSE 100 share that he thinks could help create a portfolio large enough for a…

Read more »