Domino's Pizza and PZ Cussons: Which one's the bargain?

by Graeme Evans from interactive investor |

Both stocks are down heavily this session, but one is thought to have much better recovery potential.

Problems overseas sent shares in Domino's Pizza (LSE:DOM) and soap maker PZ Cussons (LSE:PZC) skidding sharply lower today, even though the pair defied the Brexit gloom.

For Imperial Leather and Original Source maker PZ Cussons, its latest setback again stemmed from Nigeria operations as shares were left trading at a fresh 10-year low.

The fall for Domino's is not quite so damaging for investors, given that today's 7% slide only wipes out half the gains achieved since the start of 2019. However, there's likely to be some frustration that its admission of "growing pains" for new international ventures has overshadowed what was an impressive UK performance.

As is the Domino's norm, the story of trading over the festive quarter to December 30 is best digested in bite-sized stats. Most notably, a record 535,000 pizzas - or 12 every second - were sold on Friday 21 December, while the previous Saturday saw a new online record as families watched the final of Strictly Come Dancing.

In City terms, this amounted to a 4.5% rise in like-for-like sales for the quarter and a performance much better than forecast, particularly given strong comparatives. Numis Securities, for example, had been looking for growth closer to 2%.

Domino's is also confident about the outlook for the UK delivered food market, which it believes will grow at a compound rate of 8% a year to £9.3 billion by 2022.

Source: TradingView weekly chart (*) Past performance is not a guide to future performance

The company has vowed to maintain market share over this period, telling its Capital Markets Day it continues to see the potential for 1,600 stores. Reaching this target is likely to depend on whether CEO David Wild can improve relationships with franchisees, some of whom are reported to want a bigger share of profits.

Wild's other big focus will be on the international operation, which is now expected to make a loss of up to £4 million in the financial year after system sales in the quarter declined 2% to £26.6 million. This was driven by "business integration challenges" in Norway, where there are now 46 Domino's outlets.

The company continues to see long-term potential overseas, although in the meantime the difficulties will mean group profits for the 2018 financial year coming in at the lower end of the £93.9 million to £98.2 million consensus range.

Shares trade on a projected price/earnings (PE) multiple of 15.7x, which Numis views as "highly attractive" for an asset-light business offering 11% earnings per share growth. It is also weaker than peers trading at between 33x and 26x.

Peel Hunt analyst Douglas Jack added:

"The 15.7x PE rating is not strenuous. It represents a low entry point for investors that believe in the long-term merits of a franchise model with a dominant position in a fast-growing traditional pizza delivery market." 

He has a target price of 325p, while Numis is at 374p.

The situation at PZ Cussons is much less comfortable for investors after another 11% slump for shares in the wake of half-year results. While the company has been encouraged by improved trading in Europe and Asia, the "extremely challenging" trading conditions in Nigeria mean annual profits will be closer to £70 million. This caused JP Morgan Cazenove to lower its forecasts by 13%.  

Nigeria is one of the company's biggest markets, with divisions spanning personal care, home care, food and nutrition and electricals. However, consumer spending has been subdued and the currency continues to devalue. In addition, PZ Cussons said today it was taking a £5.5 million profits hit to cover significant port disruption.

In contrast, Cussons reported a good overall performance in Europe as new product launches helped drive revenues growth in the UK washing and bathing division.

Source: TradingView weekly chart (*) Past performance is not a guide to future performance

The group's balance sheet remains strong, with net debt in the half year lower than the prior period. It has maintained the interim dividend at 2.67p per share.

Investec Securities trimmed its target price from 300p to 265p today, having cut £10 million from profit forecasts in both 2019 and 2020.

However, analyst Nicola Mallard added:

"If Nigeria can be stabilised, the group offers value relative to its European and US peers."

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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