2017 was an certainly an interesting year for holders of £1.7bn-cap Domino’s Pizza (LSE:DOM). Shares fell heavily last March after the company reported slowing growth in UK like-for-like sales. By June, the stock had dropped below the 300p mark, at which point I became convinced the market had overreacted.
Since then, sentiment has returned with Domino’s shares climbing back to 350p by start of 2018. Based on today’s news — and initial market reaction — I think this momentum should continue as we move through the year.
Above expectations
Today’s Q4 update revealed that trading had been ahead of the firm’s expectations with “good volume growth” helping to offset recent investment in the business. In the 13 weeks to Christmas Eve, group sales rose a very healthy 18.2%.
Broken down, sales in the UK increased just over 10%, helped by 37 new stores being opened over the reporting period. Events such as the X Factor final also led to more families staying at home and ordering food to be delivered with online sales rising 14.5%.
Elsewhere, Domino’s continues to execute its international growth strategy with new stores added in Switzerland, Norway and Sweden. Acquisitions were also made in Iceland and Germany. All told, the company now operates just under 1,200 sites.
As a result of today’s stellar numbers, the company now expects underlying pre-tax profit for the full year will come in“slightly above the current range of market expectations”. A reduction in capital expenditure estimates for the last financial year — from a range of £50m-£60m to somewhere between £45m-£50m — also appeared to please the market.
Thanks to the consistently excellent returns on the money it invests, high operating margins and decent free cash flow, Domino’s stock is unlikely to ever be screamingly cheap, trading at 22 times earnings before today, based on growth estimates for the new financial year. Nevertheless, I remain convinced that the company is a great pick for quality-focused investors.
Transformational times
Last year was huge for AIM-listed dotDigital (LSE: DOTD), a stock that first captured my attention last July. With a recent trading update referencing “strong strategic progress” being made at the Software-as-a-Service (SaaS) provider, 2018 looks like it could be even better.
Group revenue rose to £18.8m over the last six months, a 25% increase on the H1 2016/2017 financial year. Encouragingly, the same percentage of total sales now come from overseas, with revenue from the US up 44% to $3.3m, and Asia Pacific regions up 75% to £0.9m. Earnings before interest, tax, depreciation, and amortisation are also expected to be in line with management expectations.
As part of its strategy to create a “fully integrated omnichannel marketing platform“, dotDigital purchased Comapi over the reporting period, thus explaining why its cash balance had more than halved by the end of 2017. In addition to stating that the last six months had been “transformational”, CEO Milan Patel reflected that revenues since the acquisition had exceeded the company’s original expectations.
Shares in dotDigital’s have climbed 65% in value over the last 12 months. While trading at 33 times forecast earnings suggests a lot of positivity is already reflected in its valuation, I wouldn’t rule out a further rise before interim results are officially announced at the end of February.
