Investment Column: Valuation makes Domino's hard to digest
Thursday 31 March 2011
Our view: Hold
Share price: 427.2p (-18.8p)
Investors in Domino's Pizza appear to have suffered from a bout of indigestion since its shares hit an all-time high of 586p in the first week of January.
The pizza group's shares fell back further yesterday after it posted a sharp slowdown in its underlying sales for the 13 weeks to 27 March. Many retailers would give their right arm for the 4.2 per cent rise in like-for-like sales seen at Domino's 607 mature stores, but the increase paled in comparison with the mouth-watering growth of 10.5 per cent seen during the same period last year.
Domino's performance in the Republic of Ireland has been dire this quarter. Sales slumped by 10.5 per cent, and the company blamed this for the decline in its growth (though the Republic accounts for only 7.4 per cent of the chain's total sales). The operator of 672 outlets also said its UK sales would have been higher if the increase in VAT had been taken into account.
That said, we believe that the wider slowdown in consumer spending has finally caught up with Domino's, which has increased sales, profits, dividends and its share price strongly over the last five years.
Analysts at Peel Hunt have forecast a 12 per cent rise in pre-tax profits this year. Indeed, the fundamental reasons for backing Domino's remain intact, notably that its competition has failed to keep pace in recent years with its marketing, quality of service and expansion.
The company has also shown itself to be a formidable online operator, with e-commerce accounting for more than 39 per cent of UK sales in the last 13 weeks. Investors should also note that Domino's is already benefiting from an increase in orders from mobile devices. No doubt the number of orders made in this way will get a further boost once Lance Batchelor, the former head of Tesco Mobile, joins as deputy chief executive this summer.
In fact, the only real problem we have with the ingredients at Domino's is its spicy earnings valuation of 22 times forward earnings. For this reason, we suggest that investors let the price cool down a little before buying further shares.
Charles Taylor Consulting
Our view: Buy
Share price: 140p (-19p)
Charles Taylor Consulting (CTC), it is worth pointing out, has nothing to do with the former Liberian president on trial at the Hague, and everything to do with the business of insurance.
The group started life as a coal merchant in the 1840s before moving into managing the Standard Steamship Owners' Protection and Indemnity in 1885. Today CTC, which listed on the London Stock Exchange back in 1996, has four operations, the biggest of which are management services for mutuals and adjustment services.
Revenues were up slightly from £96.6m in 2009 to £99.1m last year, but the company admitted that 2010 had been difficult. Pre-tax profits fell by a fifth to £12.5m and the company cut its dividend in half, saying it needed greater financial flexibility to re-invest. The headline figures in the company's full-year results were in line with the house broker's hopes, though the market did not appear to be pleased and the stock fell to levels not seen since the group listed.
That apart, the company's chairman, Rupert Robson, believes good things are in store once the newly announced chief executive, David Marock, takes up that role in the summer. The year may have started slowly for Charles Taylor, with a pretty mixed performance across the board, but trends may be moving in the company's favour.
Mutuals are more profitable, there is a more favourable regime in the UK, and business is likely to pick up after the tragic earthquake in Japan.
Moreover, with an undemanding forward earnings multiple of less than seven times, we think this stock may be worth a punt.
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