Domino’s Pizza still has plenty of problems to fix, and bullish outlook from housebuilders Barratt and Redrow

“After an impressive session on Wall Street last night where the S&P 500 jumped 1.5% and the Nasdaq was up 2.1%, global markets went off in different directions on Wednesday. Asian shares extended the rally with Hong Kong’s Hang Seng index up 0.4% and Japan’s Nikkei 225 index advancing by 1%,” says Russ Mould, Investment Director at AJ Bell.

UK and European markets were down, with the FTSE 100 slipping 0.3% to 7,419 and similar declines seen in Germany and France.

“The FTSE was dragged down by weakness in tobacco stocks, led by Imperial Brands’ big profit warning.

“The sector had been rallying since the fourth quarter of 2019 as investors took the view that the industry’s problems were more than priced in and tobacco companies were still able to generate lots of cash flow and maintain generous dividend payments.

“Unfortunately next-generation products are not growing as fast as many people had expected and there is considerable regulatory and political pressure on the sector."

Domino's Pizza

“It seems odd that shares in Domino’s Pizza are rising when there is quite a bit of bad news in its latest trading update.

“It has reported a slowdown in the pace of organic growth with fourth quarter sales up 4.1% versus 5.8% in the same period a year ago. Even stripping out the troubled overseas interest shows the UK and Irish operations are experiencing slower sales growth. There is no solid progress with offloading the international operations, it is suffering millions of pounds worth of impairment charges, and net debt guidance has been raised.

“The company is still searching for a new chairman and chief executive. The sad death of chief financial officer David Bauernfeind in December also means it needs a new numbers person.

“Furthermore, Domino’s is locked in a dispute with franchisees and it says the ‘complex’ situation will take time to resolve.

“At some point, a new leadership team will be in place and can hopefully find a way to improve franchisee relationships and finally put an end to the overseas distractions. For now this is very much a business on a high wire which cannot afford to put another foot wrong.

“Consumers may love the products but there is still a sour taste to Domino’s situation. It needs to fix the multitude of problems which have tarnished its reputation otherwise it could end in a sticky mess.”

Barratt Developments / Redrow

“The housebuilding sector has a lot more pep since December’s general election delivered a dose of political certainty and that is reflected in today’s respective half year results from Barratt Developments and Redrow.

“Barratt wins out between the two. Robust first half volume growth helped to boost confidence in its ability to hike full year completions between 3% and 5% a year over the medium-term.

“Impressively the company has been able to increase its margin despite a fall in average selling prices as it delivers new product ranges and there looks to be a chance for full year estimates to be moved upwards off the back of these numbers.

“Investors will also be pleased to see the company’s generosity with special dividends extended into 2021 – reflecting its continuing strong net cash position.

“Redrow enjoyed a somewhat less successful first half, with revenue and earnings down by double digits. This reflects guidance for a stronger weighting than usual to the second half.

“Such a situation may provoke a little nervousness as there is a risk if the expected level of home completions don’t come through then it could be forced into a profit warning.

“However, recent trading has been reassuringly robust and the company signalled its confidence in the outlook with a healthy increase in the dividend.

“Some eyebrows may be raised at the departure of executive chairman John Tutte, who only moved from the CEO’s seat to replace founder Steve Morgan less than a year ago.

“Current chief operating officer Matthew Pratt will become CEO once Tutte retires, suggesting the company is aiming for stability and continuity with its corporate succession plan. The changes will also complete a transition to a more conventional board structure.”

These articles are for information purposes only and are not a personal recommendation or advice.