I love a good growth stock, almost as much as I love pizza. My favourite fast food brand is Domino’s. I’m such a big fan that I’m on the company’s email circulation list. Last week, seeking to promote its Weeknight Steal, I received a message claiming: “This one’s an absolute bargain”.
I wonder if the same could be said of DP Poland (LSE:DPP), the company that operates the chain in Poland and Croatia. Could I be tempted to buy the growth stock? Let’s see.
Eastern Europe
The company opened its first store in Warsaw in February 2011. It now has 116 of them in Poland and four in Croatia.
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Since 10 September 2023, its share price is up 73%.
In April, the company raised £20.5m from shareholders. The money will be used to buy more stores, refurbish existing ones, shift to a franchise model and pay down some debt. The share price is now higher than the offer price, which suggests many investors are encouraged by the company’s growth plans – it wants to have 500 stores by 2030.
Impressively, despite Poland having one of the highest rates of inflation in Europe in 2022, the company has also managed to improve its gross profit margin. During the six months ended 30 June 2023, it was 22.2%, compared to 20.7% in 2022, and 18.2% in 2021. This suggests the business is being carefully managed and sells a product that people want to buy.
But the company is loss-making. For the first half of 2023, it recorded a post-tax loss of £1.6m on revenue of £21m. However, its losses are falling. But based on its current margin, it needs to increase its revenue by over a third to break even. This appears to be a bit of a tall order.
Also, with a stock market valuation of £103m, it’s a small company. This means it doesn’t have the financial firepower to withstand a significant shock to its business.
Therefore, I don’t want to invest at the moment.
Closer to home
But if I did want to get a slice of the pizza business, there’s another option.
Domino’s Pizza Group (LSE:DOM) runs all the restaurants in the UK and Ireland. It has a market cap of £1.35bn, which removes some of my concerns about investing in a small company.
Over the past five years, its share price has risen 29%.
The takeaway market in Great Britain is said to be worth £14.4bn, with the company claiming to have a 7.2% share of this.
But its underlying earnings per share fell slightly in 2023 to 18.4p (2022: 18.7p).
And its underlying profit before tax has remained fairly flat over the past five years – £99m (2019), £101m (2020), £114m (2021), £99m (2022), and £102m (2023). It appears to be a solid, if unspectacular, performer.
Its gross profit margin is 46.5%.
The company is clearly not growing as fast as its sister in Eastern Europe. On the other hand, it’s a more mature business so, perhaps, this isn’t surprising. But I think other companies — in different sectors — have better growth opportunities. Therefore, I don’t want to take a position right now.
So for the time being, I’m going to stick to eating pizzas rather than invest in the companies that sell them.
