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This FTSE 250 growth stock looks too cheap to me. Time to grab a slice?

Shares in FTSE 250 member Domino’s Pizza (LSE: DOM) burst out of the blocks in early trading, despite today’s interim results for the six months to the end of June being something of a mixed bag.

Group system sales — that’s everything sold by franchised and corporate stores — came in 4.7% higher than over the same period in 2018. Sales in the UK and Ireland rose 5.5% to £596m with 82% of orders being made online.

Performance overseas, however, wasn’t quite so great with system sales falling 3.4% (but pretty much flat when currency fluctuations are taken into account). Indeed, Domino’s recorded an operating loss of 6.4m for this part of the business — a big increase on the £1.8m loss reported over the first half-year of trading in 2018.  Trading in Norway was particularly poor, according to the £1bn cap, and it also saw “increasing losses” in Sweden and Switzerland. As a result of this, group underlying pre-tax profit fell 7.4% to £42.3m. To make matters worse, outgoing CEO David Wild reflected that trading visibility for its International business “remains limited“. 

Despite opening 13 new stores over the trading period (bringing its total store estate to 1,272), Domino’s also continues to face the wrath of its 70 franchisees over their share of profits. A solution that satisfies both parties is expected, but unlikely until some time next year. 

Worth buying a slice?

The Domino’s share price has been stuck in a trading range of between 225p and 275p since the start of 2019. Considering that investors’ initial enthusiasm for the shares as markets opened quickly dissipated, it seems likely that this will continue to be the case for a while to come. Of course, there’s always the possibility that Domino’s could follow the majority of other stocks and head southwards in the short term if the US-China trade war further intensifies and everyone runs for the exits.

That said, I can’t help but think that a forecast price-to-earnings ratio (P/E) of 14 looks pretty cheap considering its average on this metric over the last five years has been 25. In addition to this, Domino’s yields a decent 4.3% based on analyst estimates of a 10.1p per share cash return in 2019. That’s a nice bit of income for a stock that’s traditionally only featured on growth-focused investors’ watchlists.

Good value as I think the shares are, however, it’s worth highlighting a couple of things. On the downside, levels of debt have been rising over the last few years to such an extent that Domino’s no longer boasts a net cash position. Indeed, net debt came in at almost £239m by the end of June — a 31% rise in 12 months — as a result of “Brexit-related stock building” and “timing issues“. A small reduction on this burden to somewhere between £220m and £230m is expected at the end of the year.

To be clear, I don’t believe this is a reason not to own the shares, but I do think the fact that higher interest costs are increasingly impacting profits is something prospective owners might wish to keep an eye on.

There’s also the aforementioned issue that the company needs to find a new leader. Again, this doesn’t necessarily spell doom but may impact investor sentiment towards the company in the short term, particularly if a replacement isn’t found within the current financial year to resolve the issues with franchisees.

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Paul Summers has no position in any of the shares mentioned. 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.