Down 18%, is Domino’s Pizza now a FTSE 250 bargain?

The past year has taken a slice out of the share price of Domino’s Pizza Group (LSE: DOM). The FTSE 250 share is now 18% below where it stood 12 months ago.

That means that it trades on a price-to-earnings (P/E) ratio of 11. That is less than half the P/E ratio of New York-listed Domino’s Pizza Inc.

The US business model is different, as it makes money franchising the brand, whereas Domino’s Pizza is simply a local franchisee. But the UK business is performing much better than the consistently loss-making eastern European franchisee, London-listed penny share DP Poland.

It also offers a 4.2% yield, above the 3.6% average for FTSE 250 shares.

Could this be a bargain share to add to my portfolio?

Lots to like about Domino’s

While the share price movement suggests the business may be facing tougher times than before, I am less sure about that.

In the first quarter, total orders were higher year on year and like-for-like sales also grew. The growth was modest, but I still see it as positive.

Last year’s figures also did not contain obvious cause for alarm, in my view. Yes, revenues slipped slightly. But underlying profit before tax grew 8.4%.

By contrast, statutory profit after tax was down by over a fifth. However, the prior year’s (2023) figure had been enlarged by the sale of a German associate. Last year’s number was 11% ahead of the 2022 equivalent. I see that as solid progress.

Indeed, something I like about Domino’s is its strong profitability. Last year’s statutory profit after tax of £90m on revenue of £665m equates to a net profit margin of 13.6%.

Some watchouts for investors

Still, there are some concerns I have about the investment case.

Net debt grew last year to £266m. That is a little over a quarter of the current market capitalisation. I see that as manageable but would prefer a lower debt level, as interest costs eat into profits.

Higher staff costs are also a risk to profits across the food industry this year and Domino’s is no exception.

Possible bargain

Still, even weighing some of those risk factors, the current share price of this well-known FTSE 250 brand still looks cheap to me.

Customer demand is resilient and the brand is a strong one. The business model is proven and generates juicy profit margins. The company is scaling up, which is adding more economies by spreading costs wider.

I reckon the Domino’s business is a solid one that still has sizeable growth potential. It is throwing off cash and looks set to keep doing so. The dividend yield is attractive to me and the dividend per share has been growing.

All things considered, if I had spare money to invest at the moment I would be happy to tuck this FTSE 250 share into my portfolio.

The post Down 18%, is Domino’s Pizza now a FTSE 250 bargain? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Domino’s Pizza Group Plc. 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.