Is Domino’s Pizza a tasty investment for the future?

Since 2015, the Domino’s Pizza share price has been treading water. Post-pandemic, could it be primed for growth?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There is a piece of advice given by top UK fund manager Nick Train that can underpin an investment opportunity. “If a company owns or manufacture products that taste good it’s likely to be an excellent company”. He also suggests that “the taste of a product is something it is quite hard to imagine the internet disintermediating”.

This was my starting point in a search through the FTSE 250. It didn’t take long for me to find a company, which in my opinion makes tasty products.

Domino’s Pizza Group (LSE: DOM) has adjusted to the Covid-19 pandemic as well as can be expected. The recent trading update showed full-year profit to be in line with consensus with a rise in recent sales. A sterling digital performance was further good news for investors. The company has also benefitted from the temporary UK VAT cut. In an interesting parallel with supermarkets, the pandemic has shifted sales more into delivery orders. The costs incurred are higher for deliveries than collections. This detracts from margins.

In my opinion, Domino’s Pizza has characteristics that should be at the forefront of a Foolish investor’s mind. Manika Premsingh examined the investing case in October. It is a resilient, cash generating business, with a strong brand. However, the recent share price trend has been downwards, suggesting investors are wary of future prospects.

Clouds on the horizon

Domino’s Pizza uses a franchise model. Usually investors have much to gain from this position. The income from each store does not have a high degree of cost attached. There is an additional revenue stream from selling equipment and ingredients to franchise owners. However, business growth depends on finding people willing to open new franchises, or expand existing ones. For Domino’s, this is a problem.

Domino’s Pizza — struggling to grow?

Domino’s strategy for growth has been to add new stores within existing franchise territories. This has resulted in more sales to customers, and ingredients to stores. New stores, however, have taken sales from existing franchise owners. Concurrently, disruption from rivals such as Just Eat has increased competition both for sales and delivery staff. CEO Dominic Paul addressed these issues in the latest update. He called for realigning the relationship with franchisee partners by agreeing a sustainable way forward. However, definitive results will take some time. There are limits to international expansion. Domino’s is also currently looking to dispose of loss-making arms in Europe.

Foolish summary

On the surface, Domino’s Pizza looks a good prospective investment case for long-term growth. The advice given by Nick Train certainly holds up well here. Consumer tastes for the product are positive, and the dividend has been reinstated. However, there are long-term, unresolved issues beneath the surface. For now, I will be avoiding the shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

bwatson1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Domino's Pizza. 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.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »