Buffet Investments in Domino's Pizza Shares: Should You Mirror His Move?
Berkshire Hathaway's (BRK.A dropping 0.34%, BRK.B decreasing 0.33%) quarterly 13-F filings often bring unexpected twists.
These documents reveal the stocks that Buffett's conglomerate has bought and sold in the preceding quarter. The notable surprise this time was Berkshire's acquisition of Domino's Pizza's (DPZ dipping 0.10%) shares, its largest purchase in the quarter.
Berkshire acquired 1,277,256 shares of the global pizza delivery giant, worth $550 million at the quarter's end. Domino's shares skyrocketed post-thursday closure upon hearing the news, following the trend when Buffett's company invests in a new stock. By the end of the post-hours session, Domino's had risen 7.8%.
An unconventional move for Buffett
Buffett has some background in the food service sector. Berkshire Hathaway owns Dairy Queen outright. At one point, Berkshire held shares of McDonald's, but it has shied away from restaurant stocks in recent years, focusing instead on sectors such as energy, banking, and technology. Buffett is also a major investor in Coca-Cola, whose customer base includes many restaurants.
In some respects, stocks like Domino's Pizza share qualities Buffett looks for in an investment. It holds the top spot in pizza delivery and maintains a global presence in the industry. Its low prices make it relatively resilient to economic downturns compared to most restaurant stocks. Additionally, the pizza delivery concept is well-established worldwide, promising continued growth.
13-F filings don't provide explanations for investments, so the reasons for Berkshire buying Domino's are left to speculation. To shed some light on the matter, let's analyze Domino's value proposition following its latest financial report.
Where Domino's stands today
Domino's was one of the top-performing stocks of the 2010s as the company reworked its pizza recipe and invested in advancements like digital ordering and delivery trackers. Recently, the stock has struggled to break out of a range it's been trading in for years.
While the streak of same-store sales growth has ended, recent results remain promising. Same-store sales growth in the U.S. was up 3%, and international same-store sales growth increased by 0.8%. Overall revenue in the quarter increased by 5%.
The company, which operates primarily through franchises, continues to expand, adding 72 stores in the quarter, bringing its total store count to 21,002. The majority of these locations are in international markets, although the company is growing in both domestic and international markets.
Domino's pays a modest dividend, yielding 1.3%, and the company has been using excess cash to repurchase shares.
Is Domino's a worthwhile investment?
Buffett enthusiasts know that the Oracle of Omaha is a committed value investor. While he prioritizes investing in a good company, Buffett also aims to buy at a good price.
In this case, the Domino's investment appears questionable. The stock trades at a price-to-earnings ratio of 27, which may seem high for a largely mature company with limited growth potential, and the stock price will likely increase further as a result of the Berkshire acquisition.
Domino's is still below its pandemic-era peak. The stock has fluctuated based on earnings results in the past few years, and its current valuation seems to be a remnant of the previous decade, when the business was growing significantly faster.
In conclusion, while Domino's leads the pizza delivery market and should continue to grow in the long term, at its current valuation and growth rate, investors can find better opportunities elsewhere in the restaurant industry.
Buffalo's decision to invest in Domino's Pizza could be seen as an opportunity for further financial expansion in the food service sector. Given Berkshire Hathaway's significant holdings in other food companies like Dairy Queen and Coca-Cola, this investment could also signal a potential shift in Buffett's investing strategy towards the restaurant industry again.
Berkshire's investment in Domino's Pizza could potentially boost the pizza giant's financial stability, considering Berkshire's reputation for strategic investments and long-term growth strategies. The backing of one of the world's most successful investors could attract more institutional investors, leading to an increase in stock price and enhanced market visibility for Domino's.
