Over the course of the last year it has paid to own shares in Domino's Pizza Enterprises Ltd. (ASX: DMP). That's because they have soared by an incredible 77%, while the ASX has risen by just 3.5%. Meanwhile, Wesfarmers Ltd (ASX: WES) has delivered a relatively poor performance, with its shares falling by 4% as greater competition in the supermarket space and declining investor sentiment hurt its performance.
Growth Potential
Looking ahead, I believe that Domino's will continue to outperform Wesfarmers. A key reason for this is that it offers better growth potential. For example, Domino's is set to utilise technology and social media to an even greater extent moving forward, with online ordering (as well as on an app) set to become easier, and quirky (yet useful) features such as GPS and the ability to create your own pizza and share it with friends on social media likely to appeal to the company's younger customers. In addition, Domino's is set to expand further in Japan, which remains a key growth market for the company.
As such, Domino's is expected to post bottom line growth of 28% per annum during the next two years. This is streets ahead of Wesfarmers' growth rate of 9% per annum during the same period and, while Domino's could surprise on the upside with its results, Wesfarmers' financial performance may come under pressure. That's because shoppers are increasingly focusing on price when buying their groceries, with them beginning to rely to an ever-greater extent on no-frills operators such as Aldi and Costco and, with the Aussie economy's outlook being uncertain, it would be of little surprise for this trend to accelerate in future.
Valuation
On the face of it, Domino's looks drastically overvalued. For example, it has a price to earnings (P/E) ratio of 52.6, while Wesfarmers has a P/E ratio of 18.6. However, Domino's has the previously mentioned higher growth forecasts and, when they are combined with its rating, it equates to a price to earnings growth (PEG) ratio of 1.86, versus 2.04 for Wesfarmers. While neither of these are particularly low (or appealing) at face value when the ASX has a PEG ratio of 1.33, Domino's has a superb track record of growth that should provide its investors with a degree of certainty regarding its future prospects.
For example, in the last ten years Domino's has increased earnings at an annualised rate of almost 17%, while cash flow has improved by 18% per annum during the same time period. With growth prospects for a number of Aussie stocks being somewhat downbeat, investors are likely to continue paying a high price for stocks such as Domino's that can offer stunning forecasts as well as a superb track record of growth.
And, while Wesfarmers has increased its earnings by 2.8% per annum during the same time period and remains a great defensive play, Domino's has greater scope to post capital gains. As such, I'd buy it ahead of Wesfarmers.
