This Outstanding Pizza Corporation's Shares Find Their Way into Warren Buffett's Investment Strategy. Worth Considering an Acquisition?
Even with his substantial wealth, Warren Buffett, as he confirms, maintains a preference for modest comforts. Frequently, he's been captured relishing a diner meal, centered around burgers and soda.
This connection to typical American food staples might have motivated one of Berkshire Hathaway's more unanticipated acquisitions through its investment arm. Buffett and Berkshire now possess a portion of celebrated pie peddler, Domino's Pizza. Here's a quick overview of this enduring restaurant business, along with an analysis of whether investors should mimic Buffett's strategy by purchasing some slices (or shares).
The strength of the slice
The Domino's acquisition was made public on Thursday, in Berkshire's latest 13F filing (the regulatory document tracking the quarterly holdings of significant investment managers). In total, Buffett and his team amassed close to 1.28 million shares of Domino's. On the day the buy was disclosed, the stake was valued at approximately $557 million.
Although this isn't sufficient to make Domino's one of Berkshire's largest holdings (Berkshire has 29 positions valued over $1 billion), nor does it guarantee Berkshire an influential presence in Domino's ownership structure (the stake represents less than 4% of shares outstanding), it's still an intriguing move. As of yet, Buffett and his Berkshire lieutenants haven't expounded on their motives.
Domino's is an undeniable brand with extensive recognition. A long-standing company, over half a century old, it's the one many consumers (particularly in the U.S.) most readily associate with national pizza delivery. Buffett has a history of being attracted to powerful brands, as well as resilient underdogs. Domino's, underperforming in the eyes of investors, seems to fit the bill. Its year-to-date price gain of less than 6% pales in comparison to the S&P 500 index's nearly 25% increase.
This stock seems cornered
Investors typically want their stocks to outperform, and Domino's has failed to meet that expectation in recent times. The company operates in a challenging industry, with intense competition, and its franchise outlets (accounting for 94% of its total) face competition from numerous other pizza establishments.
Yet, management has managed to keep growth momentum going. Sales increased by almost 4% in the third quarter, with same-store sales growing by 3% in the U.S., and slightly less than 1% internationally. Domino's growth strategy relies on both its expansion program (primarily abroad) and revenue enhancement in its existing locations.
The company also offers a dividend, with a quarterly payout of $1.51, translating to a yield of 1.4%. This is slightly above the 1.2% average yield of S&P 500 index stocks.
This stock appears baked in
This level of growth might not be groundbreaking, but it's decent. Projected earnings growth of 14% for 2023 compared to 2022, and 5% in 2025, aligns with analyst estimates for sales growth (6% for both years).
In terms of valuations, the forward price-to-earnings (P/E) ratio stands at 24, and the five-year price/earnings-to-growth (PEG) ratio is a little over 2.1. While not poor numbers, they don't suggest a compelling bargain. For instance, peer food stock McDonald's has a similar forward P/E and a slightly higher five-year PEG ratio (2.7).
Domino's seems well-managed, but its growth potential seems limited. The popularity of pizza in the U.S. and abroad is undeniable, yet it isn't a groundbreaking concept. The high earnings growth forecast for this year might be optimistic, and Domino's yields lower than competitors like McDonald's.
I lack Buffett's investing insight, so I might be missing something appealing about Domino's that escapes me. But in my view, its recent performance and projected future growth do not suggest a company poised to skyrocket in value. The stock does not feel like a wise investment, even at its current price.
Given Buffett's recent investment in Domino's Pizza, one could argue that he sees potential for growth in the company's finance sector. With the substantial amount of money invested, Buffett and Berkshire are hopeful that they can help Domino's expand further and improve its financial performance.
Furthermore, Buffett's history of investing in strong brands and resilient underdogs suggests that he sees value in Domino's, despite its current financial performance falling short of the S&P 500 index. His investment strategy could potentially yield significant returns for Berkshire Hathaway shareholders.
