Investment Column: Investors should take a slice of Domino's

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The Independent Online

Domino's

Our view: Buy

Share price: 238p (+18.5p)

There are a number of companies that continue to record impressive sets of results, no matter what the economic situation.

One of those that carries on delivering, in more ways than one, is Domino's Pizza, the franchise takeaway group. Yesterday's announcement that the company expects to beat the market's full-year profit expectations, after saying that interim profits are up 25 per cent, is impressive, but increasingly the norm.

Some of the reasons why are intuitive. As the credit-crunched stay at home during the recession, rather than spend money going out, Domino's benefits as a low-cost alterative to a restaurant. The group no doubt also benefits from the growing popularity of fast food and has seen spikes in sales after sponsoring the popular Britain's Got Talent television show.

However, despite the stellar results, like a number of other recession-defying businesses we have covered in the last few weeks, we are a little nervous that the share price may have reached its peak.

We are not alone. The analysts at KBC say that the group's valuation already prices in the good operational performance, adding that Domino's "2009 price earnings ratio of 18.1 times looks fair in relation to earnings growth of about 14 per cent and the 3 per cent yield. Overall we see Domino's as a good 'hold' with a target of 240p."

On the other hand, Domino's has plenty of advocates for its stock, with most pointing to its knack of ringing up cash. Its chief executive, Chris Moore, highlights Domino's long-term expansion plan as reason to buy the stock. Moreover, beyond a complete economic meltdown (we are still bearish, but not that bearish) there is not much in terms of risk, apart from what applies to execution, costs and the like, he says.

While we think the stock is already looking pricey, we do not see too much hampering Domino's growth plans, and the extra cash that will generate should be attractive to investors. Buy.



Peter Hambro Mining

Our view: Buy

Share price: 627.5p (+29p)

One thing investors would appreciate from Peter Hambro Mining, the Russia-focused gold miner, is a return to dividend payments, which were halted last year.

"So would Mrs Hambro," says chairman Peter Hambro, adding that his wife is a major shareholder.

Investors, including Mrs Hambro, should not have to wait too long. After a tricky few months leading up to Christmas last year, the group issued an upbeat half-year update yesterday, saying that gold production was up an impressive 54 per cent, and that the second half of the year, when operations are less hampered by frozen ground, should be more impressive. New production facilities are on track and the group's venture into iron ore is moving along nicely.

Add to that Mr Hambro's assertion that the stock is "outstandingly cheap" (we would agree there is room for the stock to grow), and you have a decent investment case. Such is the share price, the analysts at Liberum Capital argue that punters get the iron ore operations, based 100 miles from China's border, for free.

We would be buyers on the basis that the group is very confident about the rest of the year and because the shares are cheap. There will also be pressure on the company to reinstate the dividend as soon as possible after such a positive update. Buy.



SThree

Our view: Buy

Share price: 184p (-2.5p)

If there is one market we really do not fancy at the moment, it is recruitment. With unemployment continuing its inexorable march upward, why would you want to buy shares in an industry that makes its money from a rapidly shrinking market?

The short answer is that you would not. Unless, you are considering SThree, the specialist IT recruiter, that is. Yes, the group reported tepid first-half profit numbers yesterday, adding that permanent placements were down 34 per cent in the first six months of the year. The stock dutifully fell 1.3 per cent.

But we would be buyers. The group is in the enviable position of filling specialist jobs that have sent the average permanent placement fee up by 17.3 per cent on the same period last year.

That would not in itself be enough were it not for the fact that SThree has done well in terms of cash, which at £43.9m has underpinned the dividend yield of 6.4 per cent. The analysts at KBC argue that the stock will reach 220p, saying: "Our target price is based on a multiple of eight times a forecast cycle-average earnings of 27.5p."

We would stress our distaste for anything in the recruitment sector, but there is an exception to every rule and we would recommend SThree. Buy.

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