The mantra of legendary investors such as Warren Buffett and Peter Lynch is to invest in businesses that you can understand. Personally, I feel more comfortable investing this way, too. Companies like Domino’s Pizza Enterprises Ltd. (ASX: DMP) and Retail Food Group Limited (ASX: RFG) fit this category. In simple terms, both companies are in the business of making and selling food in a retail environment. Furthermore, both recently reported fantastic results.
Contestant No. 1: Domino’s Pizza
Domino’s, of course, specialises in selling pizza and does so with tremendous success. Domino’s has provided investors with staggering returns to this point, thanks to its innovative and entrepreneurial CEO, Don Meij. He has transformed Domino’s into an international and technological powerhouse of the fast food industry.
Domino’s aims to be the largest pizza delivery operator in Japan by the end of this financial year and is on track to achieve its first double-digit margins in Europe. The company plans to open its milestone 1,500th store later this year. Domino’s leads the way in ordering, tracking, monitoring and creating your own pizzas through its digital platforms.
Contestant No. 2: Retail Food Group
Retail Food Group operates franchise, retail and wholesale operations in a variety of food areas, including pizza, donuts, baked goods and coffee. It is the franchisor behind Brumby’s Bakery, Cafe2u, Crust Gourmet Pizza, Donut King, Michel’s Patisserie, Pizza Capers, The Coffee Guy and Gloria Jean’s Coffee.
Retail Food Group is also rapidly growing its international business through its recent coffee acquisitions and an agreement with a Chinese company to expand the Gloria Jean’s brand in that country. The acquisitions of Gloria Jean’s and Di Bella coffee has taken the number of outlets RFG operates to 2,476 across 45 international territories.
Retail Food Group is already the largest wholesale coffee roaster in the country and is set to increase its already significant market share in the growing coffee industry. Whilst coffee looks to be the diamond in the business, Retail Food Group has also managed to achieve organic growth in its non-coffee brands.
Domino’s Pizza v Retail Food Group
Price/earnings ratio 53.27 / 23.15
Price/Earnings/Growth ratio 1.88 / 1.04
Return on equity 17.6% / 11.9%
Dividend yield 1.2% (100% fully franked) / 3.4% (100% fully franked)
Dividend reinvestment? No / Yes (2.5% discount)
Both are great companies with enormous potential and are proving to be well managed. They have increased guidance for their profit outlook this financial year and most analysts have predicted staggering earnings-per-share and dividend-per-share growth for both companies for the next five years.
However, if I were to pick one to invest my money in today, it would have to be Retail Food Group. Aside from the perhaps justifiably high valuation of Domino’s Pizza based on past performance, I am more convinced that Retail Food Group can justify its current valuation in the future. Add to this its friendlier dividend yield and option to reinvest and Retail Food Group continues to get my money – and wins the food fight!
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Motley Fool contributor Max Cooper owns shares in Retail Food Group.