Woolworths Limited (ASX: WOW) and Domino's Pizza Enterprises Ltd. (ASX: DMP) are two companies which are facing very different outlooks. In the case of the former, its industry is coming under increasing pricing pressure from no-frills, discount operators such as Aldi and Costco and this is being exacerbated by relatively weak consumer confidence during 2015 which has caused many people to become increasingly price conscious. And, with Woolworths having no immediate replacement for its outgoing CEO, it appears to have a rather downbeat outlook.
Domino's, meanwhile, is looking in the opposite position. The fast-food chain is going through a major growth period, with it aiming to double its store numbers in the Asia-Pacific region as well as increasing its exposure in other markets through an acquisition strategy. Furthermore, Domino's is in the process of expanding its menu choices, with chicken offerings being well received by customers and it having the potential to grab market share from non-pizza fast food rivals over the medium term.
However, like Woolworths, Domino's has been flagged up as a 'sell' by many investors of late. Unlike its index peer, though, the reason for this is not a pessimistic outlook, but rather fears surrounding Domino's valuation. For example, having soared by 97% since the turn of the year its shares trade on a price to earnings (P/E) ratio of 61 versus 15.8 for the ASX. As such, many investors feel that now is an opportune moment to take profits.
Although expensive, Domino's has superb growth prospects. For example, in the next two years it is forecast to increase its bottom line by 28.9% per annum and this puts it on a price to earnings growth (PEG) ratio of 2.1. While this is still much higher than the ASX's PEG ratio of 1.4, Domino's is a far more reliable prospect than the wider index, as evidenced by its annualised growth rate of 15.2% during the last decade.
Furthermore, Domino's is not yet anywhere saturation point; as evidenced by its scope to rapidly increase store numbers. And, even if store growth slows down in future years, the opportunity for horizontal diversification remains high.
Similarly, selling Woolworths right now does not appear to be a sound move. That's because while the company does face an uncertain outlook and released a profit warning recently, its current valuation appears to take this into account. For example, Woolworths currently trades on a price to sales (P/S) ratio of just 0.5, which is 64% lower than the ASX's P/S ratio of 1.4.
And, while a price war may be the current state of the supermarket sector, a 3.9% rise in consumer confidence levels last month plus a strong GDP result indicate that the future prospects for retailers may be much better than the market is currently pricing in. This, plus a yield of 5.2% which is covered 1.25 times by profit, indicate that Woolworths, alongside Domino's, is a buy rather than sell right now.
