Domino's Pizza (DOM)

[Asagi]

Domino's Pizza is a franchisor of the Domino's Pizza brand in the UK. From the 2016 Annual Report:

Domino’s Pizza International Franchising Inc. (‘DPIF’) is the owner of the Domino’s brand across the globe. We have two Master Franchise Agreements in place with DPIF, which gives us exclusive rights to the markets in the UK, the Republic of Ireland, Switzerland, Luxembourg and Liechtenstein. In addition, we have associate investments in Germany, Iceland, Norway and Sweden. Our aim is to be the number one pizza company in every neighbourhood in which we operate.

http://investors.dominos.co.uk/system/f ... s-2016.pdf

The company has a 25th December year end.

Market cap: £1.53bn
Bid:offer 311p:311.5p

2016 P/E 24.1
2017 P/E (forecast) 20.6
2016 yield: 2.6%
2017 yield: 2.9%

Domino's reported net debt of £30.6m at the last balance sheet date with results on March 9th. Results were accompanied by the announcement of a £4m acquisition in Norway of what was the country's 3rd largest pizza operator.

Dividends at the company have been increasing since 2000. In the last five years, sales growth has averaged 11.4% per annum. Dividends in that time have increased at an average rate of 14.3% a year.

The shares are currently trading near a low for the year, having fallen heavily with recent results. Those figures showed a substantial decline in like-for-like UK sales growth. In 2015, sales growth, by Domino's two measures, was +13.5% and +11.7%. For 2016, these growth figures were 9.8% and 7.5% respectively.

Domino's has enjoyed significant growth in profitability from online and mobile. Online was 72% of sales for 2016, a 21% improvement on the year before. I haven't clarified the extent to which online sales are of any help to Domino's, though I guess their corporate stores will benefit and maybe the revenue deal changes for online business sent to franchisees. Mobile accounted for 73% of this figure, i.e. just over half of sales. Mobile sales rose 31% in the year.

Mobile is great for businesses. It facilitates consumer's impulsive natures, meaning more orders, with higher total order values.

But it is likely that the growth reported in the first few weeks so far is what has really worried investors, causing the shares to fall from around 400p to near-300p.

UK LFL sales growth came in at +3.9%. UK 'LFL sales including splits' growth was just +1.5%.

That's not the sort of growth we expect from a P/E 20 company! I'm left wondering what the right price is for Domino's shares but am happy to accept that it deserves a premium rating.

I expect input costs and minimum wage headwinds.

Regards,

Asagi (no position)

[ADrunkenMarcus]

I've held DOM since March 2010 and I've been happy so far.

It wouldn't surprise me if it goes through something of a rough period in the next year or so - all companies do - but it's delivered a CAGR in dividends in the low teens since purchase. In terms of dividend yield, it isn't a bad time to purchase given its history, but there's certainly an issue in whether it can sustain a high PE ratio. The business itself has great returns on capital.

DOM was Bed & ISA'd this April but DPP - already inside - is about ten or eleven times the size!

Best wishes

Mark.

[Johny]

I bought 9090 shares @276.5
I think it is worth 3.5- 4.
One brokerage report caused a panic.

[ADrunkenMarcus]

Welcome to the club, Johny!

I had seen one article which indicated the shares are selling at a 13 year low (in terms of PE ratio). I think you are right that people have panicked recently and I see Domino's Pizza Group as, fundamentally, a good company going through a periodic slowdown. Looks like you can look ahead to a dividend yield of 3% or more which is very healthy indeed if the company can sustain high single or low double digit dividend growth.

As well as owning Domino's Pizza Group since March 2010, I am much more heavily invested in DP Poland. DP Eurasia is, shall we say, more exotic!

Best wishes

Mark.

[ADrunkenMarcus]

Assuming the final dividend payment is increased at the same 7.1% as the interim or better, DOM is trading with a current dividend yield of 3.3%. Quite tasty and, if it does turn out that are at that stage where they are maturing and growth is slowing, then continued cash generation should enable them to reward their shareholders - whether by enhanced dividends or buy backs.

I am not against their plans for buying back shares at these levels.

Best wishes

Mark.

[Topidiotboy]

I am in at a £3 average price, and believe that the current 270p share price is fair value. A year ago I would have been far clearer that this is a bargain share price and I have owned since 2015, but now I have doubts.

Potential competition from Pizza Hut. The extent of how much of a threat this could be is a factor, and is presently an unknown, although analysts seem to think that it is a factor in weak LFL figures. If Pizza Hut prove themselves to be a strong competitor, then some of the historic premium valuation deserves to be lower. Equally, if Pizza Hut are unable to make an impact, then the concern goes away. A similar thing happened with Rightmove. The price slumped when there were fears that On the Market would provide some effective competition. In the event that came to nothing, and for me it’s impossible to say if the Pizza Hut story will be the same. BTW, I don’t believe Deliveroo or Just Eat are significant stories in terms of competition.

Regardless of what happens, for me I think it shows that the competitive moat may not as bullet proof as it appears, and this has created some uncertainty for me. I’ll wait and see, but if we don’t see LFL figures returning to above inflation soon, then this will be a clear sell signal. I accept that as a franchisor, total sales are more important than LFL, but equally LFL sales should always be ahead of inflation as a minimum requirement if DPZ has true pricing power.

The recent announcement that they have purchased stores in London in collaboration with a franchisee to take advantage of growth opportunities in London, also has me worried. Surely, the franchisee’s are the most appropriate group to unlock these opportunities, rather than DPG becoming a restaurant owner. The Franchisor model is the whole point of what makes DPZ so attractive, otherwise how is it any different to say the Restaurant Group. I think unless the company provides a more compelling rationale for this transaction, this is a black mark for me, and any expansion of this strategy will be a clear sell signal to me.

In summary, I have some doubts about whether this is really a great business or an average one that has had a great run, and secondly I have some doubts about the ability of management to allocate capital effectively. They are only doubts at the moment, so I’ll continue to Hold, but I would not recommend a buy until there is more clarity on these things. For me I would need to see how the company trades over the next year before we see this clarity.

[ADrunkenMarcus]

Those are certainly valid concerns and, as you say, given time we'll have a better idea of whether it is a rough patch or a more sustained slowdown. Long term, it's hard to sustain the sort of LFL growth DOM was recording for so long.

I do think there is much to be said for their international expansion. It will be good to see how that develops. My biggest holding, by far, is DP Poland which has the master franchise for that country.

Best wishes


Mark.

[ADrunkenMarcus]

I bought 9090 shares @276.5
I think it is worth 3.5- 4.
One brokerage report caused a panic.

It's getting closer to that price range now, Johny!

Best wishes


Mark.

[westmoreland]

an update on DOM.

hopefully germany, norway, sweden will provide decent growth going forwards. there are also plans to exploit the london market more through corporate owned stores. DPG made a complete mess out of the germany opportunity.

just to correct the OP: 'I expect input costs and minimum wage headwinds.'. the input costs and minimum wage affects franchisees, not the franchisor, which demonstrates the attractive business model. DPG target a cash margin on food costs i.e. £1000 per tonne of cheese - they absorb some of the cost if there are huge swings, but make more if input costs go down. the franchisee bears much of these risks.

will be interesting to see how the strategy of splitting territories pans out. this must be monitored closely, as it is a danger they overexpand. that said, the franchisees will bear the risk of over expansion, not DPG.

trading around £3.50 at the moment. i continue to hold.

[ADrunkenMarcus]

I may be tempted to top up on DOM in April, if it is trading at these levels. Estimates show a forward cash flow yield of 5.9% for 2021, which is good even if growth is slowing. It's a shame they trashed the balance sheet by doing so many buybacks at inflated prices!

Best wishes

Mark.

[Spet0789]

I may be tempted to top up on DOM in April, if it is trading at these levels. Estimates show a forward cash flow yield of 5.9% for 2021, which is good even if growth is slowing. It's a shame they trashed the balance sheet by doing so many buybacks at inflated prices!

Best wishes

Mark.

My wife bought in a few months ago. I think the recent concerns are ignoring the great economics of being a franchiser. Even if you consider the glory days of high earnings growth to be over, this can still be a very solid investment. Pizza deliveries tend to weather the economic cycle well. As disposable income worsens, people buy takeaway pizza instead of going to a low-end chain restaurant.

In my view they either find ways to grow, or can return FCF to shareholders. Works for us either way.

[ADrunkenMarcus]

In my view they either find ways to grow, or can return FCF to shareholders. Works for us either way.

Now that they are not going to be making such losses from the international businesses, perhaps the cash from the core UK and Ireland businesses will be directed to us.

Best wishes

Mark.

[TheMotorcycleBoy]

Has this firm effectively been "re-rated" since it's exit from Europe means it's no longer a growth stock, hence PE is less since predicted EPS growth is also less.

Hence the stock has now become more of an income play?

[ADrunkenMarcus]

Has this firm effectively been "re-rated" since it's exit from Europe means it's no longer a growth stock, hence PE is less since predicted EPS growth is also less.

Hence the stock has now become more of an income play?

Could well be. It's dividend yield is certainly far higher than the c. 1.5% I recall getting when I bought back in 2010. Exit from international makes long term growth more of a challenge but helps short term as it cuts losses.

Best wishes

Mark.

[TheMotorcycleBoy]

Has this firm effectively been "re-rated" since it's exit from Europe means it's no longer a growth stock, hence PE is less since predicted EPS growth is also less.

Hence the stock has now become more of an income play?

Could well be. It's dividend yield is certainly far higher than the c. 1.5% I recall getting when I bought back in 2010. Exit from international makes long term growth more of a challenge but helps short term as it cuts losses.

Best wishes

Mark.

With that in mind, perhaps their current price £2.90 at PE 28 is quite pricey. Perhaps PE 20 is more appropriate. Not that I'm an expert, still 20 months or so new to the game.

Matt

[ADrunkenMarcus]

With that in mind, perhaps their current price £2.90 at PE 28 is quite pricey. Perhaps PE 20 is more appropriate. Not that I'm an expert, still 20 months or so new to the game.

How did you get to a PE of 28?

Best wishes

Mark.

[TheMotorcycleBoy]

With that in mind, perhaps their current price £2.90 at PE 28 is quite pricey. Perhaps PE 20 is more appropriate. Not that I'm an expert, still 20 months or so new to the game.

How did you get to a PE of 28?

Best wishes

Mark.

Hi Mark,

If I bung this string into my browser

https://www.google.com/search?q=dom+sha ... 8&oe=utf-8

(or just do a search "dom share price) then the first hit is a brief summary and it has a figure for the p/e. In most situations it's a reasonably accurate TTM I think.

Do you reckon it's wrong then?

Matt

[ADrunkenMarcus]

Do you reckon it's wrong then?

At a glance, adjusted EPS for 2018 came to 16.1p so at a share price of 292p then the P/E on a historic basis is 18.1 - this for a stock which has traded in the mid 20s and was about 30 when I bought it back in 2010. Despite the PE ratio coming right down, it's delivered a 151% share price gain and dividends on top probably take the total return to 200% or so (I'm away from my spreadsheet).

Best wishes

Mark.