This company has an exemplary track record, and the trend for ordering in food rather than cooking shows no sign of abating. So this share should be a sound investment, but the future looks less certain.
Domino’s Pizza (Aim, DOM: 464p) tipped as a BUY by The Sunday Telegraph
Fancy a bite to eat while glued to the World Cup on TV? Why not try a Double Decadence, or even the mouth-watering Football Fanatic pizza from Domino’s? Each day, thousands of people across the UK are munching their way through pizzas that are biked to homes within 30 minutes of ordering.
Domino’s is neither a fast-food restaurant (there are no eat-in facilities) nor a takeaway (on average only 30% of food is collected). It’s a pizza-delivery service. The company has
419 stores in the UK and Ireland, each run by a franchisee licensed under the Domino’s brand.
Typically, each franchisee invests £230,000 upfront, pays royalties and can expect to break even after three years. Domino’s owns the exclusive rights to operate the franchise in the UK and Ireland, granted from the US-based owner, Domino’s Pizza Inc.
The company directors should certainly be applauded for Domino’s excellent historical results. Both sales and EPS have risen consistently from £45m and 4.0p in 2001, to £82m and 16.3p in 2005. This growth is set to continue, with forecast sales and EPS of £107m and 21.8p respectively in 2007 – an expansion driven by new franchisees and increased like-for-like sales.
On the basis of this exemplary track record and the anticipated boost that the firm will gain from the World Cup, The Sunday Telegraph recommended the stock as a buy. I would agree that Domino’s is a good company, but I also expect future sales growth to slow.
Why? I think the World Cup could have artificially brought forward new store openings and it seems likely that the rate will fall immediately after the tournament. Secondly, if higher utility and council-tax bills start to hit consumers’ pockets, discretionary items, such as delivered pizzas, could be replaced by cheaper take-home varieties from the supermarkets.
The board have recognised this danger and indicated back in April that
“like-for-like sales growth in the second half of 2006 would be more modest than in the first 16 weeks of the year”.
Finally, there is also the risk that there will be a concerted crack-down on unhealthy foods. The Food Standards Agency has recently suggested banning televised advertisements for junk foods before the 9pm watershed to help counter child obesity.
The UK home delivery and takeaway markets are extremely competitive.
Even if the firm meets its consensus forecasts of 15% EPS growth in 2007 (which looks challenging), then I still believe the shares are overvalued. At 464p, they trade on a toppy 2007 p/e of 21, which in my opinion is too rich.
Recommendation: SELL at 464p. There are cheaper opportunities elsewhere
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