The last time I reviewed FTSE 250 incumbent Domino’s Pizza (LSE: DOM) at the beginning of the year things were going well.
It’s fair to say the goalposts have shifted somewhat since then. Is one of the most shorted stocks around an opportunity or one for me to avoid? Let’s take a closer look.
Tough 2024
Domino’s is the UK’s premier pizza delivery business and it owns the master franchise in this region for the global business.
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It’s been a tricky 2024 to date, and I reckon this is reflected in the share price activity. Over a 12-month period, the shares are down 21% from 378p at this time last year, to current levels of 274p.
I reckon this is a direct consequence of economic volatility, which has prompted a cost-of-living crisis. Consumers are battling higher living costs such as food, energy, and rent or mortgage costs. Less money to spend on extras such as takeaways has impacted the business as well as investor sentiment. It’s worth noting that this is an ongoing risk I’ll be keeping an eye on.
Another risk I reckon is certainly worth noting is that of changing consumer habits. The spotlight on health consciousness and healthier food is certainly something that could hurt fast food firms like Domino’s in the longer term.
The good stuff
Enough of the negativity, and on to the good bits, and there’s plenty of them, in my view at least.
Kicking things off, it’s hard to ignore the returns Domino’s shares have presented to savvy investors who got in early. I wish I was one of them! For example, in 2004, shares were trading for close to 21p, so those who bought in then will be laughing all the way to the bank.
Furthermore, in this period, Domino’s has paid a dividend for each year, which is an impressive feat. At present, a dividend yield of 3.8% is decent. However, it’s worth noting that dividends are never guaranteed, and that the past isn’t a guarantee of the future.
A big reason for Domino’s past impressive achievements is due to its strong brand power, reputation for quality, and wide presence. The latter is something that continues to grow today, especially through its savvy franchising model which means it can grow and maintain quality standards.
More crucially, the business has a great level of profitability with low overheads and high margins. The proof is in the pudding when I consider that the business averaged 30% return on capital employed in the past five years.
To buy or not to buy?
For me, I reckon the pros outweigh the cons, and by some distance. Recent economic turbulence has hindered the share price. However, I believe it’s offered a better entry point for potential investors like me. The shares currently trade on a price-to-earnings ratio of 14. This is good value for money for an established business with a fantastic track record and brand power.
I’d be willing to buy some shares when I next have some free cash to invest.
