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Terry Tolich, Senior Investment Analyst
06 March, 2017
You might think that share prices for large, well-followed companies would be relatively stable over a short period of time like a year, as investors would have a good idea of what the businesses are worth. However, nothing could be further from the truth. Over the past year, we have seen a swing of up to 55% between the highest and the lowest prices of the stocks on the ASX300 index.
In most instances, the underlying values of companies will have changed by a far smaller amount. Much of the volatility in share prices is due to investors focusing on short term factors that will ultimately have little impact on the long term value of a business. This means investors, like us, who take a long term view, can take advantage of these price swings.
Earnings reporting seasons are a rich source of short term noise that can set share prices swinging. In the recent Australian reporting round, portfolio holding Domino's Pizza provides a stunning example. With a 14% share price drop on result day you would be excused for thinking a disaster had befallen the company rather than it reporting a 31% jump in first half earnings and raising its full year profit guidance to 32.5% growth.
In the weeks leading up to the result, concerns about the impact on Domino's franchisees of a pending new wage agreement and allegations of franchisees underpaying staff had weighed on the share price. In our view, however, Domino's largely allayed these fears with information accompanying the result. We believe a lower than expected European sales growth rate, versus their full year guidance, was the likely culprit for the share price slump.
Domino's European team had a lot on its plate during the half including conversion of the acquired Pizza Sprint and Joey's Pizza chains and the ongoing roll-out of Domino's IT systems that have been integral to its Australian and New Zealand success. Consequently, we see the latest European sales result as nothing more than a blip in what remains a great long term European growth opportunity.
Our long term view of Domino's value remains largely unchanged — we were happy to take advantage of the market's short term focus and weakened price.
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