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Billionaire Warren Buffett just bought shares of Domino’s Pizza. Time to get into the stock?

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Time to get into the stock?

Warren Buffett Berkshire Hathaway has created enormous wealth for shareholders, and a significant portion of these returns comes from purchasing shares of strong companies at attractive prices relative to their estimated value. The company had a stock portfolio worth $271 billion in the third quarter, and one of its new purchases was Domino’s Pizza (NYSE:DPZ).

For Berkshire, it’s a small position, representing less than 1% of the company’s stock portfolio. Given the small stake, it was likely chosen by one of Buffett’s investment representatives – Todd Combs or Ted Weschler – who manage some of Berkshire’s stock investments. Either way, Combs and Weschler were handpicked by Buffett and therefore have similar investing skills to the legend himself.

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Domino’s Pizza is an interesting choice as the fast food industry is very competitive. But over the last 15 years, the stock has returned an astounding 5,500%, indicating an impressive competitive advantage that could make the stock a great buy after the recent decline.

Domino’s has a huge brand presence

Pizza isn’t a fast-growing industry, but Domino’s is growing faster than the average pizza chain. In the first three quarters of fiscal 2024, Domino’s retail sales rose 6.6% year over year, outperforming the rest of the market, which grew less than 2%.

Domino’s competitive advantage lies in its ubiquitous brand presence. The company has more than 21,000 stores in over 90 markets worldwide. This large store footprint generates high sales volume, with the company’s trailing 12-month sales at company-owned and franchised stores reaching nearly $19 billion.

Additionally, its model of earning royalties and fees from its franchisees helps improve its bottom line. Domino’s profit margin has increased steadily over the past 15 years and recently reached a new high of 12%, which is consistent with the S&P 500 Average.

A double-digit profit margin in a crowded pizza industry reflects a strong brand, as there are many brands that sell essentially the same product and compete primarily on price. However, A key advantage for Domino’s is its large store base, which allows the company to attract many customers who live in close proximity to each store.

As long as the company can price its product to generate a healthy profit, which Domino’s clearly does, shareholders should be well rewarded. Over the past 10 years, the company achieved average annual revenue growth of 9.5% and earnings per share of 19%.

Is the stock a buy?

The stock has recovered significantly since its low of $289 in 2023. It rose to a 52-week high of $542 before falling back to the current share price of $430. From a valuation perspective, Domino’s shares are at their lowest price in 10 years, so Berkshire’s investment gurus have certainly picked a good time to open a position.

DPZ PE ratio chart

Over the past decade, the stock’s price-to-earnings ratio (P/E) has fluctuated between a low of 22.3 (2023) and a high of 46.8 (2017). The current P/E ratio is 27.5 at the time of writing, which seems reasonable for the company’s growth prospects.

Wall Street analysts expect Domino’s to post 10% annual earnings growth over the long term. While this level of growth will not produce market-beating returns, the company’s competitive position and track record of profitable growth give Berkshire a degree of certainty about its future growth trajectory. The stock can outperform the market average in the coming years if it beats earnings estimates.

I wouldn’t jump into the stock expecting big returns, but Domino’s Pizza should be a worthwhile long-term investment.

Should you invest $1,000 in Domino’s Pizza now?

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Domino’s Pizza. The Motley Fool has a disclosure policy.

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Time to get into the stock? was originally published by The Motley Fool