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Is Domino’s Pizza a tasty investment for the future?

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There is a piece of advice given by top UK fund manager Nick Train that can underpin an investment opportunity. “If a company owns or manufacture products that taste good it’s likely to be an excellent company”. He also suggests that “the taste of a product is something it is quite hard to imagine the internet disintermediating”.

This was my starting point in a search through the FTSE 250. It didn’t take long for me to find a company, which in my opinion makes tasty products.

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Domino’s Pizza Group (LSE: DOM) has adjusted to the Covid-19 pandemic as well as can be expected. The recent trading update showed full-year profit to be in line with consensus with a rise in recent sales. A sterling digital performance was further good news for investors. The company has also benefitted from the temporary UK VAT cut. In an interesting parallel with supermarkets, the pandemic has shifted sales more into delivery orders. The costs incurred are higher for deliveries than collections. This detracts from margins.

In my opinion, Domino’s Pizza has characteristics that should be at the forefront of a Foolish investor’s mind. Manika Premsingh examined the investing case in October. It is a resilient, cash generating business, with a strong brand. However, the recent share price trend has been downwards, suggesting investors are wary of future prospects.

Clouds on the horizon

Domino’s Pizza uses a franchise model. Usually investors have much to gain from this position. The income from each store does not have a high degree of cost attached. There is an additional revenue stream from selling equipment and ingredients to franchise owners. However, business growth depends on finding people willing to open new franchises, or expand existing ones. For Domino’s, this is a problem.

Domino’s Pizza — struggling to grow?

Domino’s strategy for growth has been to add new stores within existing franchise territories. This has resulted in more sales to customers, and ingredients to stores. New stores, however, have taken sales from existing franchise owners. Concurrently, disruption from rivals such as Just Eat has increased competition both for sales and delivery staff. CEO Dominic Paul addressed these issues in the latest update. He called for realigning the relationship with franchisee partners by agreeing a sustainable way forward. However, definitive results will take some time. There are limits to international expansion. Domino’s is also currently looking to dispose of loss-making arms in Europe.

Foolish summary

On the surface, Domino’s Pizza looks a good prospective investment case for long-term growth. The advice given by Nick Train certainly holds up well here. Consumer tastes for the product are positive, and the dividend has been reinstated. However, there are long-term, unresolved issues beneath the surface. For now, I will be avoiding the shares.

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

bwatson1 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.

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