Domino Printing Sciences

Falling like Domino

I expected Domino (DNO) to be dull. In fact it’s at the forefront of technology, manufacturing machines to stamp food, beverages, drugs, building materials, automotive parts and packaging with sell-by dates and identification codes.

Its annual report does an unusually good job of explaining the business and one map in particular stands out:

Only 8% of Domino’s revenues come from the UK.

While the radio spouts an unremitting monologue of doom, it’s tempting to think economies elsewhere must be more prosperous but I’m mindful there are probably European, Asian and American stock pickers peering over their screens thinking the same thing.

Once you take out the beneficial effect of the falling pound, Domino’s sales didn’t grow in the second half of 2008, and the annual report says the slowdown is global:
While the group has experienced depressed market conditions from low economic growth in certain regions in the past the slowdown witnessed in the second half of this year has been more widespread and not confined to any particular geographical region or market sector.
Still, its 30-year history is reassuring. It’s survived recessions before, albeit local ones, and grown into a FTSE-250 stock. The directors have survived them too. The only executive director to join the company this century is the technical director, who joined in 2005. The chairman joined in 1996 and the managing director and commercial director joined in the ‘80s.

Although Domino’s closed factories and made redundancies already, high fixed costs mean it would find it difficult to match falls in sales with cost cutting, and profits might fall in 2009.

Even so, Domino’s shares are cheaper, relative to past earnings, than they’ve been for many years. The long-term PE is 13, an earnings yield of 8%. If the impact on profits is short lived, sellers of the shares are presenting value investors with an opportunity and there’s the comfort of a dividend yielding nearly 6%, raised by 20% in 2008.

The only dent in Domino’s financial strength revealed by a cursory look at its financial statements is the £5m decline in its cash balance and the £13m increase in its short-term loans and overdraft to £15m. It still had more cash than debt at the yearend in October, though, and Domino says it spent the money on share buy backs and acquisitions.

It’s hard to choose the pick of the week. ITE has international appeal, like Domino. Both service a broad range of businesses, some, automotive for example, in disarray. They’re financially sound and ‘in the buy-zone’, selling for less than 16 times average earnings. Both pay good dividends and raised them heftily last time.

I think I’ll go for ITE, its slightly cheaper and I recently picked a manufacturer in Dewhurst.

Footnotes:

The pick of the week isn’t a recommendation, it’s simply a company that:

1. Recently published its annual report, and...
2. ...of those that I’ve looked at this week, best fits my value criteria.