This might be why Buffett bought Domino’s Pizza (NYSE: DPZ) stock
Warren Buffett put Domino’s Pizza (NYSE: DPZ) in the spotlight in November, when his Berkshire Hathaway (NYSE: BRK.B) announced that it bought the company’s stock in the third quarter.
The firm snagged 1.3 million shares, worth $550 million as of Monday, little changed from Sept. 30.
Berkshire didn’t say why it likes the stock, but there are several factors that may have caught its eye.
Domino’s same-store sales are rising, while those of competitors Papa John’s (NASDAQ: PZZA) and Pizza Hut (NYSE: YUM) are falling. Domino’s management predicts that its global retail sales will climb about 6% in fiscal 2024 and 2025. It then sees annual growth of 7% or more for 2026-2028.
The company’s technology for ordering pizzas through its app is superior to competitors, analysts say. That’s important, as 85% of its sales are digital. And Domino’s works with both Uber Eats (NYSE: UBER) and Door Dash (NASDAQ: DASH) on deliveries.
Two-thirds of Domino’s locations are in Europe and Asia. Sales have suffered there due to sluggish economies in those nations, but they may come back. The company plans to increase its global store count by 5% a year through 2028 – to 25,500 from 21,000 now. It sees great potential in India and China.
Almost all of Domino’s restaurants are franchised, so the company receives franchise fees and has limited capital expenditures. It has done a good job helping its franchisees make money, analysts say.
The valuation story
As for valuation, Domino’s has a forward price-earnings ratio of 24.31, about the same as the S&P 500’s ratio of 24.19. But the S&P 500’s PE ratio is well above its five- and 10-year average, while Domino’s ratio is far below its five- and 10-year average.
Moreover, franchise-model companies tend to have higher PE ratios, because that model involves less risk.
Domino’s might not be the first value-stock play that comes to your mind. It sells a commoditized product in a very competitive industry.
The stock has generated a negative annualized return of 7% over the past three years. It would be interesting to know what Buffett and his colleagues think of some stocks that have performed even worse, such as Nike (NYSE: NKE). It has a negative 22% annualized return for the past three years.
Nike too resides in a very competitive industry. Unlike Domino’s, it has been the clear leader in its space — athletic apparel – at least until the last year or so. But Nike has plenty issues of its own, as do most stocks trading at bargain prices. So Buffett may well have made the right choice with Domino’s.
