The Motley Fool

Should I pile into Domino’s Pizza Group plc., up 10% today?

Domino’s Pizza (LSE: DOM) has risen by as much as 10% today after it released a third quarter update. The company’s performance appears to be encouraging despite a challenging outlook for UK consumers. As such, investors appear to have reacted positively to its investment prospects. Could this be the right time to buy more of it for the long term?

Improving performance

Perhaps the most encouraging part of today’s update from the company is its performance in the UK. A number of consumer-focused businesses which operate in the UK have reported that trading conditions have been tough, with higher inflation causing consumer spending to come under pressure. However, Domino’s has been able to buck this trend to a large extent.

For example, UK system sales were up 11.6% versus the same period of the prior year, while UK like-for-like (LFL) sales moved 8.1% higher. Much of this growth was centred on the company’s online offering, with UK online sales up 17.4%. However, the recent marketing campaign by the company has also returned many customers to the brand. In fact, the current advertising campaign which focuses on the brand being “The Official Food of Everything” drove a record 200,000 online orders on the last Saturday in September.

Future prospects

In its update, the company states that UK consumers remain focused on value, which suggests they are becoming increasingly price-conscious. Despite this, it appears to be focused on long-term growth and plans to open 90 new stores this year. As well as growth potential in the UK, the integration of the acquired Dolly Dimples stores in Norway is progressing as planned. There also appear to be growth opportunities in other territories such as Switzerland and Sweden.

Domino’s now expects full-year profit to be at least as high as current market expectations. While the company has a price-to-earnings (P/E) ratio of 24, its strong growth potential means that it could deliver further capital growth over the medium term.

Strong outlook

Also offering an attractive investment case at the present time is engineering specialist Babcock International (LSE: BAB). It is forecast to post a rise in its bottom line of 4% in the current year, followed by further growth of 7% next year. While this rate of growth is roughly in line with that of the wider index, the stock trades on a relatively low valuation.

For example, it has a P/E ratio of just 9.8 and when combined with its rating, this equates to a price-to-earnings growth (PEG) ratio of just 1.4. This suggests the company offers growth at a very reasonable price.

In addition, Babcock has a dividend yield of 3.6% from a payout which is covered 2.8 times by profit. This suggests there could be significant dividend growth ahead for the business, which is unlikely to hurt its financial strength. While the company’s end markets may experience some volatility in the short run, the stock appears to be a sound buy for the long run.

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Peter Stephens owns shares of Domino's Pizza and Babcock International. The Motley Fool UK has recommended Domino's Pizza. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.