US Edition Domino's Pizza
502½ -20½
Questor says BUY
The fast food company reported a solid set of 2010 numbers, although the market was disappointed with the trading update for the first few weeks of the current year, prompting the shares to fall 7pc at the open.
Investors are used to the group outperforming significantly – but like-for-like sales in the first seven weeks of this year came in at 4.7pc higher, compared with an 11pc rise in the first six weeks of last year. Indeed, for the past five years the company has started each year with double-digit like-for-like increases.
When a company has grown as fast as Domino's, year-on-year comparisons are going to get harder, but the underlying operations are still very strong.
The 4.7pc increase in like-for-likes in the first few weeks was also accompanied by a 73pc increase in internet sales. This is a positive development. The company also plans to launch an app for the iPad and for Android mobiles "imminently".
The 2010 figures were more or less in line with expectations. In the 12 months to December, revenues rose to £188m from £155m in 2009, but pre-tax profits fell to £35.6m from £41.3m. The fall was due to a one-off credit last year, associated with the purchase of its Domino Leasing unit.
When these exceptional items are stripped out of the numbers, pre-tax profits increased by 27.3pc to £38m – which is a record result for the company.
There was excellent news on the dividend, which was increased by more than expected. The final payment was raised by 34pc to 5.7p and will be paid to investors on March 31. The shares trade without this payment from February 23, so new buyers of the shares have until this date to qualify.
This brings the full-year payment to 10.2p, a rise of 31.6pc. The prospective yield is 2.3pc, so there is plenty of scope for more returns through dividend increases and buybacks.
Last year, Domino's bought back 1.2m shares at a cost of £4.7m. It is likely that such moves will continue and yesterday's fall will provide a good opportunity for the company to use its cash to buy back some more shares cheaply.
Operational gearing is also important for this company. This means that when sales increase, profits will increase at a higher rate because of its fixed-cost base.
Domino's has finished a large investment programme in its Milton Keynes commissary, so it is going to have a high free cash flow for the next few years. The business does not expect to make a significant investment in a new commissary to 2015, so costs should remain fixed and higher sales mean even higher profits. This is reflected in Domino's operating margins, which have seen uninterrupted growth over the past decade from 8.5pc to 20.2pc today. Having substantially invested in the infrastructure, the company expects margins to continue to rise.
The shares are trading on a high rating, at 25.6 times forecast earnings in 2011.
However, Domino's should still show good growth.
Questor reckons yesterday's fall presents a buying opportunity. The shares were first recommended on July 21, 2009, when they were trading at 235¼p and they are up 114pc since then, compared with a FTSE 100 up 35pc. Buy.
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