With its share price more than doubling over the past five years, Domino’s Pizza (LSE: DOM) has been one of the FTSE 250’s great success stories of recent memory. But, is this purveyor of rapidly delivered pizzas a stock to buy and hold forever?
Well, investors who are bullish on the stock certainly have very valid reasons for their optimism. Domino’s asset-light franchisee model significantly reduces the company’s risk by freeing it from the costly running of stores and ensures steady recurring revenue from franchise fees and selling ingredients to the independently run stores. The other big upside of this model is its incredibly high level of profitability — in the half year to June Domino’s operating margin was an astounding 23.1%.
Hefty margins combined with consistent double-digit growth in like-for-like sales and the steady rollout of new stores has led to pre-tax profits increasing 88% from 2011 to 2015. As mentioned, this phenomenal performance hasn’t gone unnoticed and explosive share price growth has led to a pricey valuation of 27 times forward earnings.
This means significant future growth is already baked into the company’s share price, which raises the question of whether or not Domino’s can live up to lofty expectations. On that front there is good news, as the company has recently increased its long term UK store count target to 1,600 and international target to 400. This would mean adding roughly 650 stores in the UK and 300 in Europe in the coming years. This is an attainable target, but investors will need to closely watch whether this bevy of new locations cuts into same-store sales and leads to lower margins.
Another reason Domino’s may not be a ‘buy and forget’ share is that sales of take-out pizza are very reliant on high consumer confidence and a growing economy. If unemployment or inflation were to rise precipitously, expect to see consumers cut back on expensive treats such as eating out.
None of this means Domino’s isn’t a great share to own for the long term, but it does mean that if I were a shareholder I’d keep an eye on quarterly reports for any weakness, especially with such a lofty valuation.
Diversifying into danger?
Another recent FTSE 250 success story has been online property portal Zoopla (LSE: ZPLA), whose share price has risen 70% in the past year alone. Again, like Domino’s, this stellar share price performance isn’t without reason, as Zoopla recorded a whopping 84% year-on-year jump in revenue and 44% increase in profits in 2016.
But, Zoopla is another share that I would be hesitant to ‘buy and forget’, as it embarks on an ambitious growth and diversification strategy that is making it far more than a property portal such as its larger rival Rightmove. Instead, in the past two years Zoopla has spent £160m on comparison website uSwitch and £75m on the aptly named estate agent software provider The Property Software Group.
It’s still early days for these acquisitions but they make considerable strategic sense, as Rightmove’s dominant 77% market share appears unassailable and new property portal OnTheMarket.com threatens to squeeze Zoopla’s margins. But, these ambitious acquisitions also mean shareholders will need to monitor results for any sign that they aren’t paying off or that the core property listing business is in trouble.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Domino's Pizza and Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.