Shares in Domino’s Pizza (LSE: DOM) have soared by over 7% today as the fast food company reported impressive sales and profit figures for the first half of the year. In fact, pretax profit rose from £25m in the first half of 2014 to £32m in the corresponding period of this year, with its revenue also making strong gains: up from £145m to £157m in the same time period.
A key reason for Domino’s improved performance is its strong business model and rising popularity among its key teenage and twentysomething customer base. For example, the ease of online ordering coupled with the embracing of social media (such as create and share your own pizza topping combinations) has helped Domino’s to arguably become more relevant among its customer base than other fast food outlets. And, with an enlarged menu that includes items other than pizza (such as chicken dishes), Domino’s could be set to diversify its customer base yet further.
Clearly, it has superb medium term growth prospects, with Domino’s being forecast to increase its bottom line by 15% in the current year and by a further 13% next year. The problem for investors, though, is that much of this growth appears to already be priced in, with Domino’s trading on a price to earnings growth (PEG) ratio of 1.8.
As such, rivals such as Just Eat (LSE: JE) appear to offer better value for money, with the fast food ordering platform set to post earnings growth of 36% this year and 60% next year. Such strong growth means that Just Eat’s heady price to earnings (P/E) ratio of 77 makes sense, since it equates to a PEG ratio of 0.8, which indicates that capital gains are very much on the cards. And, with Just Eat offering significant diversity and the scope to expand across the developing world, it seems to be well-positioned to benefit from increasing demand for fast food in the long run.
Of course, food delivery is also becoming increasingly popular when it comes to groceries. That’s a key reason why Ocado (LSE: OCDO) has been able to deliver strong sales growth in recent years. Looking ahead, the maiden full year profit that was posted last year is set to rise at a rapid rate over the next two years, with growth in earnings of 42% this year and 55% next year being forecast. And, with online grocery shopping becoming increasingly popular and Ocado already having a strong brand, its long-term future appears to be very bright. The problem for investors, though, is that a PEG ratio of 2.6 indicates that its future growth prospects are more than adequately priced in.
Meanwhile, Sainsbury’s (LSE: SBRY) also has exposure to the online grocery space, although it continues to struggle from increasing competition in the wider supermarket sector. As such, its bottom line is set to come under pressure in the next few years, although this appears to be taken into account as a result of Sainsbury’s having a P/E ratio of just 12.2. And, with a new pricing strategy coupled with an improved outlook for UK consumer spending, Sainsbury’s could beat current guidance and cause an improvement in investor sentiment. In the meantime, a yield of 4.1% also holds considerable appeal.
So, while all four stocks have considerable future potential, the valuations of Sainsbury’s and Just Eat make them the preferred options at the present time.
