Cheap Pizzas, Steep Shares

Published in Company Comment on 28 September 2011

Sales leap at Domino's Pizza, but its shares have a lot of growth baked in!

Despite its 26 years on British high streets, sales continue to rise at pizza-delivery firm Domino's Pizza UK & Ireland (LSE: DOM) as Brits choose take-away convenience over the expense of eating out.

The UK's first Domino's store opened in Luton in 1985, and the first Irish store opened in 1991. Today, the UK's leader in pizza delivery has 553 stores in England, 47 in Scotland, 28 in Wales, 19 in Northern Ireland and 49 in the Republic of Ireland. Hence, it's a household name across the UK -- and a Dominos leaflet comes through my letterbox almost every week.

Delivering higher sales

In its latest quarterly results, Domino's served up sales of £127 million, 10% higher than last year. In 605 established stores, like-for-like (LFL) sales growth was nearly 4%, but LFL growth in financially stretched Ireland was below 2%.

Still, Domino's powerhouse continues to be online ordering, with e-commerce sales now accounting for nearly half of UK deliveries. Total online sales rose by 36% to £45 million. This is partly due to the launch of the Domino's iPad app to accompany its free iPhone and Android apps for smartphones.

In its latest quarter, Domino's opened 15 new stores in the UK, Ireland and Germany. This takes the total so far this year to 37 new outlets, versus a target of 64 openings. 

Staying fresh

In order to keep its product range fresh, Domino's relies heavily on product innovation. Popular recent revamps include Domino's Stuffed Crust pizzas and the new Gourmet range.

In addition, Domino's is revamping its board. Chris Moore, its current chief executive, is due to step down at the end of its financial year on Christmas Day, after 21 years with the group. Domino's has already groomed a successor, deputy chief executive Lance Batchelor, who will take the helm from 2011/12.

Looking ahead, Domino's CEO remarked, "We are pleased to have had a good quarter's trading and, although the economy as a whole is still very tough, we have exciting plans in place for the rest of the year. We are on track and confident that we will finish the year in line with market expectations."

A slice of Domino's

As I write, Domino's shares have slipped 25p to 483.5p, down 5% and valuing the business at nearly £785 million.

Despite its continued success in this new age of austerity, Domino's shares look rather over-cooked to me. They trade on a forward price-earnings ratio of a hefty 27 and their forecast dividend yield is a modest 2.4%, covered 1.6 times.

To me, these are demanding fundamentals, so I'd rather buy a Domino's pizza than a 'pizza' Domino's!

More from Cliff D'Arcy:

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Comments

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CunningCliff 28 Sep 2011 , 12:30pm

It would be a 'topping' idea if there were a prize for the best Domino's-related pun. Over to you!

Cliff

liesarenocomfort 28 Sep 2011 , 2:04pm

... the best Domino's-related pun.

Sorry, can't help; my mind's a blank.

eccyman 28 Sep 2011 , 5:34pm

Top spot for Domino's

Domino's delivers profits

jaizan 28 Sep 2011 , 6:44pm

I guess it depends on how far the growth story can be extrapolated.

PE = 27.
I like to see a PE of less than 12. Now if they can grow earnings at 20% for 5 years, that is achieved.
However, it seems growth is forecast to be dropping to 10% for the next 2 years.

Now if they can avoid saturation in the UK, roll the brand out in Germany and run 20% a year growth for the next decade, this could be an attractive share.
More likely, perhaps I have missed the boat already.

TonyTwoTimes 28 Sep 2011 , 7:35pm

For puns, saying that you want "A Pizza The Action" usually does the job.

Especially if you can do it with a New Jersey or Brooklyn accent!

goodlifer 28 Sep 2011 , 9:25pm

Can't somebody come up with something about the domino effect?

Excel35 29 Sep 2011 , 8:45am

The price drifted lower earlier in the year from its previous highs over 500p
It recovered slightly then shot up on rumours of it being brought out.
Since then it has held on to its lofty valuation through all the market falls.

This stock is so overvalued its almost unbelieveable in he current economic climate.

Great company, the sort of company Id like in my portfolio, just at a much, much lower price.

CunningCliff 29 Sep 2011 , 3:33pm

Many thanks for you comments, Fools.

I agree with those who say that DOM's price is too rich. I'd be happy to own a slice of this company, but I wouldn't buy it at a PER of 27.

Now if the PER halved to 13.5, also halving the share price to, say, 240p, then I'd be in like a shot. Fat chance of that happening, though!

Cliff

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