Britons love their takeaways and pizza deliveries, and Domino’s Pizza Group (LSE: DOM) and Just Eat (LSE: JB) have reaped the benefits. However, both have faltered recently and may struggle to justify their pricey valuations. Should you still take a bite?
Domino’s published its 2017 results this morning and the market reckons it has delivered, with its share price up 3.33% at time of writing despite a 2% drop in statutory profit before tax to £81.2m. Investors preferred to focus on the crunchy 10.2% rise in underlying profits before tax to £96.2m, topped with a tasty 29.3% rise in revenue to £474.6m. Underlying earnings per share (EPS) growth of 13.9% to 16p made a nice side order, to exhaust the metaphor.
CEO David Wild hailed a year of significant progress which was particularly pleasing given “weaker consumer demand and cost inflation affecting the sector.” UK system sales broke through £1bn for the first time, helped by a record 95 new store openings, while international operations are growing in importance, with progress in Ireland, Switzerland and now Norway.
Wild said the group’s strong brand and scale give it important competitive advantages, and should help maintain its share in the pizza delivery market as it aims for 1,600 sites.
Investors should reap the rewards with a planned £50m share buyback programme, while the recommended total dividend per share rose 12.5% to 9p. Its forecast yield is now 3%, covered 1.7 times. EPS growth is expected to flatten in 2018, halting four years of double-digit increases, which is a concern, even if City analysts are pencilling in 10% growth in 2019. The forecast valuation of 19.4 times earnings looks toppy given the consumer squeeze, but my Foolish colleague Paul Summers still likes his pizza.
Just Eat to the beat
Just Eat also has to combat the consumer squeeze, as well as growing investor scepticism over whether it can continue its breakneck pace of growth. Its share price is still up 100% over two years and 41% over the past 12 months, but it took a knock after its results earlier this week.
As my Foolish colleague Kevin Godbold reported at the time, Just Eat’s share price plunged despite posting an impressive set of full-year results, which included a 45% rise in revenue on 2016. The problem lay in the forward guidance on profits, which will be hit by plans to pump an extra £50m into the business to keep ahead of fast-moving and well-capitalised competition.
Something to chew on
The stock is now trading 12% lower than a week ago, so does this move it into bargain territory? Hardly, given its current forward valuation of 35.8 times earnings. Although, that is actually an improvement on 44 times when I last reviewed the stock in October.
EPS are forecast to grow 40% in 2018 and 31% in 2019, which are the kind of numbers Just Eat needs to post to keep the momentum going. Brokers are struggling to keep pace with this fast-moving £5.25bn company, with its international prospects particularly hard to rate. It is a risky, pricey buy. If that does not worry you, the recent sell-off could make a tempting entry point.
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Harvey Jones no position in any of the shares mentioned. The Motley Fool UK has recommended Domino's Pizza and Just Eat. 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.