Recently, I have not just been looking for cheap shares to buy – I found some and have been adding them to my portfolio.
One of them is a well-known, profitable company with ongoing growth plans – and what I see as an attractive share price.
Strong brand and ongoing growth prospects
The company in question is Domino’s Pizza Group (LSE: DOM).
To be clear, this is the London-listed company that operates the local pizza business in the UK, not the New York-listed master franchisor.
Domino’s business model strikes me as a straightforward one. It offers economies of scale and the company can hopefully exploit those more by growing its business in Britain.
It has refocussed its business geographically in recent years though continues to operate outside the UK, for example in the Republic of Ireland and Poland. But it is the growth opportunities in its biggest market that have caught my eye.
Simply by sticking to its knitting and continuing to execute well on its business plan, I reckon Domino’s could do well. Even though it fell 22% last year, the company’s profit after tax was still £90m. That equates to a net profit margin of 14%.
Why I see value
The fall in profit helps explain why Domino’s made it onto my list of shares to buy.
The share price has tumbled 17% over the past year, reflecting City nervousness about the business performance. But that puts it on a price-to-earnings ratio of 11.
I see that as attractively valued for a business that is strongly profitable, has proven it can succeed, benefits from a strong brand, and has a large customer base. Indeed, it has been trying out a loyalty programme with around 630,000 customers and now plans to expand that to roughly 3m pizza lovers.
There are risks. Net debt is £266m. I see that as manageable but it is higher than I would like. Pizza sales could fall if consumers tighten their belts (which would be hard to do in both senses if they eat too much pizza!)
But I essentially see this as a pretty straightforward business that simply by continuing to do what it has been doing lately ought to be able to create long-term shareholder value. Not only am I hopeful that the share price can grow, but I also consider the 4.3% dividend yield to be attractive.
Last year, the firm’s delivery business returned to growth. It sees opportunities to build on that momentum this year, although its focus on value-based marketing campaigns slightly concerns me. It suggests that buyers are indeed feeling the pinch economically. Competing on price can be bad for a business’s profit margins and Domino’s profitability is one of the things I like about the investment case.
On balance, to me, this share looks undervalued, which is why I decided to get a slice of the action.
