You only have to glance at the financial results for Domino’s Pizza (LSE: DOM) to understand the appeal of a franchisee business model. Interim results through the end of June saw sales up 17% year-on-year and operating margins improving to an astounding 23%, leading to a full 22.7% jump in post-tax profits.
And this growth isn’t just coming from new store openings as the period saw a 10.9% improvement in like-for-like sales as improved digital offerings tempted people into ordering more pizzas.
Although the company’s net debt rose to £10.9m, this was due to a £46.6m investment in Nordic Domino’s franchises and is well within the company’s 1.25 times EBITDA leverage range.
High growth and a healthy balance sheet allowed the company to increase interim dividends by 16.7% and analysts are forecasting shares to yield 2.2% this year. Although the shares are highly valued at 27 times forward earnings, great growth prospects, growing dividends and fantastic margins lead me to believe the shares could live up to high expectations.
And now for something completely different
Selling £1,000 handbags is unsurprisingly a high-margin business for luxury brand Burberry (LSE: BRBY). Although underlying operating margins are under pressure due to faltering sales in China and rising costs, they were still very high for a retailer at 15.4% last year.
That said, despite solid profitability the company can’t escape the continued trouble in China. A crackdown on graft and conspicuous consumption by the Communist Party combined with a slowing economy once again led to double-digit declines in same store sales in Burberry’s Hong Kong locations, where many Mainlanders shop to take advantage of lower luxury taxes.
The Chinese market will turn around eventually though, and Burberry remains well positioned to survive this downturn. The company had net cash of £660m at the end of March and worldwide revenue remained level year-on-year in Q1. With dividends growing and expected to yield 2.8% this year, continued profitability and a forward P/E ratio down to its lowest level in years, now could be a great time for contrarian investors to take a closer look at Burberry.
Cheap fares, cheap shares?
Valuations in the FTSE 100 don’t come much lower than the 10.3 forward P/E that shares of EasyJet (LSE: EZJ) now trade at. The current share price also means dividends will yield around 4.8% this year, so why in the world are shares so cheap?
Investors are rightly worried that any Brexit-induced economic slowdown will lead to fewer holidays abroad for UK consumers. As the UK’s largest budget carrier, this is no empty threat for EasyJet.
There’s also the fact that years of rapid growth for the budget sector as a whole are leading to the age old problem for airlines: overcapacity. This is a valid worry as industry watchers were forecasting a slowdown in seat demand even before Brexit.
The question then becomes whether EasyJet can survive any slowdown. With net cash at the end of Q3 at £368m, there are few worries concerning the balance sheet.
However, the company did post a £24m loss in the six months through March, a far cry from the solid 14.6% pre-tax margins posted last year. Shares may look like a bargain now but with fare wars heating up amid slowing demand, EasyJet’s time in the sun may be over for the time being.
