Why I think these two FTSE 250 growth shares could be undervalued

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Why I think these two FTSE 250 growth shares could be undervalued

UK consumer confidence continues to be at its lowest level in over five years. The GfK consumer confidence index has moved steadily lower since July 2018, and may fail to recover in the short run if the Brexit process is extended.

While this could cause some challenges for consumer-focused companies operating in the UK, it may produce an investing opportunity for the long run. Last week, two UK-focused mid-cap shares, Domino’s Pizza (LON:DOM) and Cineworld (LON:CINE), released encouraging updates. With upbeat forecasts and low valuations, they could offer impressive long-term returns in my opinion.

Domino’s Pizza

While consumer confidence in the UK has weakened in recent months, takeaway pizza company Domino’s has experienced strong growth from its UK & Ireland operations. In fact, sales increased by 9% in 2018, which suggests that demand for takeaways is strong. This is not particularly surprising, since consumers may trade down from eating out at restaurants to eating in during periods of economic uncertainty.

Domino’s international progress has been weaker than expected. However, it remains optimistic about its prospects in a number of key markets that are typically fragmented and lacking a dominant operator.

With the company forecast to record a rise in EPS of 1% in the current financial year, its P/E ratio of 14.3 suggests that it may offer good value for money. With continued investment in its online technology and an improving customer experience, as well as the continued popularity of takeaways, it could generate improving share price performance.

Cineworld

The performance of Cineworld in 2018 was very strong. The company was able to grow sales and adjusted EBITDA by 7.2% and 9.4% respectively. Crucially, its acquisition of sector peer Regal went smoothly, and its integration is progressing better than expected. The company anticipates that the combined entity could generate even better returns than had been suggested prior to the acquisition.

While the increasing popularity of streaming services such as Netflix may have been expected to hurt demand for attending the cinema, the company remains optimistic about its prospects. It is engaged in a major refurbishment programme that is aimed at providing the latest technology and comfort for customers. It is also expanding its total number of screens having signed significant new agreements with IMAX and 4DX.

Cineworld is forecast to record a rise in EPS of 21% this year. Trading on a P/E ratio of 14.4, it seems to offer a margin of safety. With greater geographical diversity following the acquisition of US-focused Regal, its risk/reward ratio may have improved.

Outlook

While UK consumer confidence could remain weak over the next few months due in part to the fluidity of the Brexit process, over the long run there are a number of FTSE 250-listed shares that could offer growth at a reasonable price. Cineworld and Domino’s are two examples of such stocks, with their recent performances and strategies suggesting that they may offer improving share price performance over the long run.

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