2016 has been the year of the FTSE 100 as the plummeting pound and signs of a recovery in the mining and oil & gas industries have sent the index up a full 12% year-to-date. Meanwhile, the FTSE 250 has borne the brunt of Brexit-related worries and posted a mere 2% gain since January 1. But, for investors who are willing to look past currency-boosted earnings, now is a great opportunity to take a second look at high quality, domestically-focused business that have been overlooked in the broader market panic.
One of the more intriguing options is Domino’s Pizza Group (LSE: DOM), the holder of rights to the American brand in the UK. Like its counterpart in the US, Domino’s has spent the past few years investing heavily in revamped food offerings and user-friendly technology in order to attract new customers and differentiate itself from competitors.
Allowing customers to place orders on the company’s app, website or through Facebook Messenger helped digital sales rise 18.1% year-on-year in Q3. Increased digital sales and 21 new stores in UK led to an overall rise in group sales of 11.5% over the same period last year.
UK Like-for-like sales growth slowing to 3.9% in the quarter is something potential investors should watch closely, but I wouldn’t be too worried. Domino’s management team isn’t resting on its laurels and is rolling out a healthier range of pizzas with more premium ingredients as well as investing in further expansion in the Nordics, Switzerland and Ireland.
With share prices flat over the course of 2016, Domino’s now trades at 25 times forward earnings. This is pricey, but the company still has substantial room to grow in the core UK market and its franchised business model led to operating margins that topped 23% last year. Combined with a healthy balance sheet and growing dividends, this is more than enough reason for me to recommend taking a closer look at Domino’s going into 2017.
Margin king
Another company that has benefited even more from consumers’ shift towards online sales is property portal juggernaut Rightmove (LSE: RMV). The far and away leader in the segment, with some 77% market share as of the end of June, Rightmove has become the go-to destination for home buyers, sellers, or anyone who is simply curious at how much their neighbour’s house is worth.
Unsurprisingly, Rightmove has leveraged this position into charging relatively high prices for listing on its site. High prices combined with a low-cost business model meant operating margins for the first six months of 2016 were a frankly eye-watering 74.6%.
Without the need to invest heavily in stores or new staff this allowed the company to return £66m of its £80.5m in pre-tax profits to shareholders over the period. Two-thirds of this cash was returned via share buybacks, which is a prime example of why investors should always look beyond the simple 1% yield the shares are offering.
Rightmove’s fortunes are obviously tied to the health of the housing market but its business model of charging estate agents a monthly fee rather than per listing does offer significant downside protection if the bottom fell out on the market. At the end of the day we don’t know for sure where the housing market is going, so in my eyes Rightmove’s dominant market share, obscenely high margins and growing shareholder returns make it a great long-term holding for 2017 and beyond.
