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One food-related penny stock I've had my eye on for some time is DP Poland (LSE: PPD). Should I buy some stocks?
pizza supplier
DP Poland owns the master franchise of Dominos Pizza In Poland. As a small cap company with a market capitalization of less than £100m, DP shares are literally trading for pennies – 10p to be exact – today.
Over a 12 month period, the shares have risen more than 40% from 7p this time last year, to current levels.
The case of the bull
The fact that DP is targeting, and appears to be succeeding in, an underpenetrated market is attractive. In addition, having the master franchise of one of the largest pizza brands in the world is a plus. In addition to Poland, the company also ventures into Croatia. This new avenue could boost profits and also, potentially, profitability.
Next, I am encouraged by DP's business model, that is, its two main segments. One is their own restaurants and the other is a sub-franchise model. The latter focuses on selling franchises and helps establish them, and collects royalties for the pleasure. It seems that this modus operandi is working well. Since opening its first store in Warsaw in 2011, it currently has 116 stores in Poland and four in Croatia. The company has ambitious plans to have 500 stores by 2030.
It should be noted that the business generates losses. This may be a red flag, but many small cap companies generate losses for several years to begin with. The good sign for me with DP is that losses seem to narrow each reporting period.
Another positive for me is the fact that the business is improving gross profit margins. It has done so for the last three consecutive years. If it can continue this way, I think we could have positive numbers very soon. However, I understand that the past is no guarantee of the future.
Risks and my verdict
Firstly, Poland has been struggling with high inflation for some time. In fact, just two years ago it already had one of the highest inflation rates in Europe. This makes the company's gross profit margin increase even more impressive, in my opinion. However, the long-term concern is that continued inflation could mean higher costs, tighter margins and the ability to make profits further afield.
Next, the company has some debt to deal with on its balance sheet. This is not usually a concern since most companies have some type of debt. However, DP recently raised funds through shareholders to pay down debt and also fund growth. Being a small cap company, it does not have the financial power to avoid financial problems. Higher debt levels and lack of cash flow in the future could be fatal.
Overall, at 10p per share and a decent growth record to date, I'd be willing to buy a small number of shares next time I can. I think DP could be a smart addition to my holdings for future returns and growth.
