Despite his immense wealth, Warren Buffett, as he admits, is a man of simple tastes. More than a few times, he’s been spotted tucking into a diner meal centered around burgers and cola.
Perhaps that focus on basic American food staples inspired one of the more unexpected new buys from his investment vehicle Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B). Buffett and Berkshire now own a slice of storied pie slinger Domino’s Pizza (NYSE: DPZ). Here’s a brief glance at the durable restaurant company, and a view as to whether investors should follow Buffett with buying a few slices (sorry, shares).
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The power of the pie
The Domino’s purchase was made public on Thursday, in Berkshire’s latest 13F filing (the regulatory document that catalogs the quarter-by-quarter holdings of large-scale investment managers). All told, Buffett and his team loaded up on nearly 1.28 million shares of Domino’s. On the day the buy was revealed, the stake was worth a total of almost $557 million.
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This doesn’t position the restaurant chain as one of Berkshire’s largest holdings. After all, the monster equity portfolio of Berkshire Hathaway has no less than 29 positions that exceed $1 billion in value. Similarly, the buy doesn’t make Berkshire an overpowering presence in Domino’s ownership structure, as that stake amounts to less than 4% of shares outstanding.
Buffett and his Berkshire lieutenants haven’t yet explained what attracted them to Domino’s, so we can only make educated guesses about their motivations.
The Domino’s brand unarguably has broad and wide recognition. Now more than six decades old, the company is the one that many consumers (at least in the U.S.) most readily identify with nationwide pizza delivery. Buffett has always been drawn to a brand with power. He also likes a beaten-down underdog, and Domino’s has not been a top dog of late with investors. Its sub-6% price gain year-to-date is eclipsed by the S&P 500 index’s almost 25%.
These days, investors like the stocks they own to be outperformers, and Domino’s hasn’t really fit the bill for a while. It’s in a tough industry, after all, and the company’s outlets (94% of which are franchise locations) are hardly the only restaurants in any given town baking and delivering pizza.
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So, in a way, it’s admirable that management has been able to keep the growth engine running. Total sales rose by nearly 4% year over year in the third quarter, with same-store sales advancing 3% in the U.S. (International growth was less impressive, at below 1%.) For the most part, Domino’s is growing through both its ever-active expansion program — mainly abroad — and through revenue improvement in its existing stores.
The company also dispenses a dividend, which at a quarterly payout of $1.51 yields 1.4%. That’s slightly above the 1.2% average of S&P 500 index stocks.
This stock appears to be boxed in
That trailing performance is decent, if not spectacular. Looking forward, per analyst estimates we can expect a little more sauce in at least one key fundamental. Collectively, the pundits tracking Domino’s expect the company to boost its per-share profitability by 14% this year compared to 2023, before settling down to a 5% improvement in 2025. Those growth figures for sales are pegged at 6% for both years.
In terms of valuations, one of the most critical yardsticks, forward price-to-earnings (P/E), sits at 24, and the five-year price/earnings-to-growth (PEG) ratio is a shade over 2.1. Like Domino’s recent performance, these are not bad numbers. At the same time, they don’t shout “screaming bargain” either. For example, peer food stock McDonald’s boasts a similar forward P/E and its five-year PEG ratio is only slightly higher, at 2.7.
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I think Domino’s is well-managed. However, its growth potential is limited. Again, pizza is popular but hardly a novelty in the U.S. and abroad, so the double-digit earnings growth projected for this year might be ambitious. Meanwhile, it doesn’t quite pass the taste test as an attractive dividend stock. Domino’s yield is low compared to rivals like McDonald’s (which currently sports a 2.4% payout).
I don’t have the vision or the investing acumen of Buffett, so maybe the wizard is seeing something irresistible in Domino’s that I’m not. But in my view, neither the company’s recent past nor its looming future indicate a business set to leap ahead in value. The stock doesn’t feel like a buy to me, even at its cooled-down price.
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Eric Volkman 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.
This Prominent Pizza Stock Is One of the Newest Additions to Warren Buffett’s Portfolio. Time to Buy? was originally published by The Motley Fool