Domino’s will heat up again
Investors have lost their appetite for the pizza chain, but the shares are cheap
WShares editor
ith the exception of China, most of the world has returned to something approaching the old pre-Covid normal. While this is cause for celebration, some of the companies that have flourished during the pandemic have seen their share prices deflate.
Domino’s Pizza Group (LSE: DOM), the UK master franchise of the US takeaway pizza chain Domino’s Pizza, is a good example. The shares went up by almost 30% in the 19 months from January 2020 to July 2021, due to people switching from eating out to staying in. It then saw another near-30% leap in a matter of weeks at the end of last year, when it looked as if yet another lockdown might be on the cards. However, after hitting a peak of 473p at the end of the year, it has since lost a quarter of its value.
Of course, it isn’t just the fear that people will ditch takeaways for restaurant meals that is causing the slide in the share price. There are concerns that higher ingredient costs may depress margins, while there is always the risk that consumers struggling to deal with inflation may decide they can do without a regular takeaway.
Customers may also be looking to tighten their belts in other ways, thanks to the recent introduction of mandatory calorie labelling on food as part of an attempt to get people to consider healthier options. These are all valid concerns.
Maintaining the number one spot
Still, it’s important to remember that Domino’s isn’t just a typical pandemic stock. Indeed, even before Covid-19 appeared, the company had built an impressive record and was maintaining the number one pizza delivery spot in the UK and Ireland. Between 2016 and 2019 it grew sales by 40% and profits by a whopping 161%. At the same time, it maintained large operating margins of just under 20%, and a return on capital expenditure of roughly 30%. All this has enabled it to keep debt low, while steadily increasing its dividend. Domino’s has a clear strategy for continued growth. As well as opening more stores, it plans to boost sales by further improving the online platform, which already accounts for over 90% of sales, and by cutting delivery times, which are already lower than most major competitors. It will also be focusing on the in-store collection market, which has done well from the removal of restrictions.
The firm is also responding to changing trends by expanding the range of pizzas on offer, especially in terms of vegan and vegetarian options. Lastly, it is also putting more cash into growing its German venture, which has already seen success. Despite all this it still trades at a modest 16 times forecast 2023 earnings with a dividend yield of 3%.
Given that Dominos’s shares are currently slightly below both their 50-day and 200-day moving averages, I wouldn’t immediate go long. Instead, I’d wait until they reach 375p before pulling the trigger, then I’d go long at £7.50 per 1p with a stop loss of 240p. This gives you a total downside of £945.
“Domino’s is not a typical pandemic stock – it has an impressive record”