Picture supply: The Motley Idiot
Legendary investor Warren Buffett likes concentrating on firms that profit from sturdy manufacturers, enduring shopper demand and a confirmed aggressive edge. So I used to be not shocked to listen to that the ‘Sage of Omaha’ has just lately purchased into New York-listed Domino’s Pizza.
However an alternate solution to spend money on the corporate can be for me to purchase shares in FTSE 250 share Domino’s Pizza Group (LSE: DOM). One other London-listed different, DP Eurasia, was taken non-public this 12 months.
Clearly, Domino’s is slightly a extra advanced firm than it could initially seem. Just like the long-term Buffett holding Coca-Cola, that is mainly a grasp franchisor firm. It owns mental property rights, runs retailers in some areas, and a sequence of worldwide franchisees that then sub-franchise inside their areas.
The FTSE 250 agency is the corporate that runs the UK and Republic of Eire enterprise. So it sits between the final word international franchisor Domino’s (what Buffett has purchased into) and particular person franchisees which will decide up the telephone if you name your native Domino’s department with the munchies for a Margherita.
Is that this a great enterprise to spend money on?
Some buyers instantly take fright once they hear phrases like franchising or licensing. However Domino’s has outpaced the FTSE 250 over the previous 5 years, rising 15% when the index throughout the identical interval has been flat. It yields 3.2% too.
What I see because the draw back of its piggy-in-the-middle position is a scarcity of management. It depends on the US guardian for the final word course of the model and advertising and marketing messages. Nevertheless it additionally depends on particular person franchisees to ship the top product and handle particular person buyer relationships.
It tries to mitigate that by proudly owning some operational websites itself, however that brings the extra complication of operating pizza retailers on high of supporting them with issues like a provide chain and promotional materials.
Not an affordable meal
In the meanwhile, the FTSE 250 trades on a price-to-earnings (P/E) ratio of 18. That’s markedly cheaper than the US enterprise’s P/E ratio of 27, however I don’t see it as low cost.
Earnings per share have been falling over the previous a number of years. The corporate additionally faces the chance {that a} weak British financial system and tightening family spending may see demand for pizzas fall. Within the first half, orders have been 1% decrease than in the identical interval final 12 months. Income fell 2%, whereas fundamental earnings per share crashed 45%.
The third quarter was extra encouraging, with whole orders up 4% year-on-year. With an ongoing push for purchasers to make use of its app and continued retailer openings, the corporate hopes to take care of that momentum.
Nonetheless, I see the FTSE 250 share as totally priced given the combined efficiency of current years, a gradual begin to 2024 and an unsure outlook for shopper spending.
I’ve no plans so as to add it to my portfolio in the mean time.
