It’s been a rough start to the day for holders of FTSE 250 member Domino’s Pizza (LSE: DOM) with its shares tumbling over 11% in the first hour of trading.
What makes this interesting for me is that today’s (11 March) full-year numbers were hardly a disaster.
Sales and profits up
Let’s start with the good news. Sales rose to £1.54bn in the 52 weeks to 24 December 2023. This pushed revenue for the year up just over 11% to £667m and ultimately allowed Domino’s to report a small increase in underlying pre-tax profit.
So, what’s the problem? Well, today’s share price drop seems to be motivated by a rather lacklustre start to 2024.
Having experienced a “slow January” in terms of trading, the firm said that orders and like-for-like sales growth would now be lower in Q1 than over the same period in 2023.
On the flip side, management still expects to deliver growth over the course of the year and for underlying earnings to come in with analysts’ current projections. Ongoing food cost deflation should also give margins a boost.
So is today’s tumble a good opportunity for me to get involved? Let’s check the valuation.
Reasonably priced
Prior to this morning’s fall, the shares were changing hands for 17 times forecast earnings. That’s not exactly cheap but nor is it screamingly expensive.
There’s also a dividend yield of over 3% on offer. That’s fairly average among UK stocks but it does look like it will be easily covered by profit. The same can’t be said for some of its index peers.
The question is whether today’s price action is a blip.
Quality stock
I think it might be. Assuming the cost-of-living crisis begins to ease over the coming months, the willingness of people to open their wallets and order food in should bounce back.
Looking ahead, there’s certainly no shortage of big events that one imagines could help business. These include Euro 2024, the Paris Olympics and (the inexplicably popular) Eurovision.
On a more fundamental level, Domino’s consistently posts high returns on capital compared to the market average. This means it makes a lot of money relative to the investment it puts in. Operating margins are also high for the consumer cyclicals sector. It’s delicious ‘quality’ hallmarks like these that I look for when scanning the market for stocks to buy.
Of course, a blazingly hot summer could push people out of their homes for longer than expected. And, yes, UK teams and athletes could exit the aforementioned sporting events earlier than predicted. So a swift recovery isn’t nailed on.
While delivering brilliantly for investors over the very long term — our favourite time horizon at Fool UK — there’s also been quite a bit of volatility in the share price on the way.
Drop overdone
As trading days go, I can understand why this may be one that investors want to forget. However, the negative reaction does feel excessive if it’s assumed that things improve as we move through 2024. There are no guarantees but I suspect they will.
If I didn’t already hold stock in another company in the takeaway food space — baked goods retailer Greggs — I’d consider buying a small slice of Domino’s today and building a position at the months pass.
The post This FTSE 250 growth stock just tanked despite posting higher profit. What’s going on? appeared first on The Motley Fool UK.
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Paul Summers owns shares in Greggs Plc. The Motley Fool UK has recommended Domino’s Pizza Group Plc and Greggs Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
