Two of the best performing mid-cap businesses on the ASX over the last five years have not come from the popular tech or healthcare sectors. They've come from the fast food and travel sectors, with headquarters in Brisbane.
There's nothing especially fancy or complicated about their business models either, with one operating as a franchisor of pizza delivery stores and the other offering travel services to its corporate clients.
Both have delivered rocketing growth through strong organic growth and global acquisitions of rival operators that are then integrated into the companies' already successful business models.
The chart below shows how the returns of Domino's Pizza Enterprises Ltd. (ASX: DMP) and Corporate Travel Management Ltd (ASX: CTD) have quite closely mirrored each other over the past five years and it would be a lucky investor to have owned both over this period.
Chart: Corporate Travel vs. Domino's Pizza returns over past 5 years. (Source Google Finance).
But which will deliver the best returns over the next 5 years?
Interestingly, both companies are forecasting reasonably similar growth rates for financial year 2017 with Domino's expecting EBITDA to be up 30% thanks in part to its acquisitive strategy, digital leadership, improving margins in Europe, and strong same-store sales growth in Australia in particular.
Corporate Travel is forecasting EBITDA growth of 33%-41% over FY16 thanks to its acquisition strategy, organic growth, increased scale, and leverage of its digital leadership to beat the competition.
However, for investors the big difference between these two fast-growing businesses is their valuations.
At $65.30, Domino's Pizza currently trades on around 47x analysts' expectations for earnings per share in the region of $1.41 over FY17.
While at $18.25, Corporate Travel trades on around 32x rough expectations for earnings per share of 56 cents in FY17 when using analysts' estimates and the mid-point of the forecast EBITDA growth as a proxy.
Although the above estimates for earnings per share should be used as a guide only, it's clear that Corporate Travel is on a cheaper valuation – and growing at a faster rate.
Mind you dinner at Nobu looks a bargain versus Domino's shares, so is Corporate Travel still a buy?
The travel firm trades on a forward price earnings to growth (PEG) ratio of less than 1, which means it still looks reasonable value when using conventional metrics to value high-growth stocks.
Moreover, as I have written before it's often the businesses executing a simple business model well that can produce the most gangbusters growth for investors. The founder-led, sales driven Corporate Travel still has a potentially long growth runway ahead of it and appears to tick the boxes at current prices.
If I did not own any shares in Corporate Travel I would look to build a position via a series of around three investments over a period of up to nine months in order to dollar cost average into it as the share price can be volatile and the business will report in February and August 2017. This is assuming you have a sufficient amount to negate the brokerage costs and maintain a well balanced portfolio.
Of course growth stocks are good, but you can't beat dividend stocks!
