When Warren Buffett’s Berkshire Hathaway reveals a new position, investors take notice. The Oracle of Omaha’s recent US$550 million bet on Domino’s Pizza (NASDAQ: DPZ) might seem modest by Berkshire’s standards, but it speaks volumes about the pizza giant’s potential.
While many view Domino’s as just another fast-food chain, the global powerhouse has transformed into a technology-driven delivery machine serving impressive shareholder returns. Since January 2015, Domino’s has returned more than 400% to shareholders in dividend-adjusted gains.
With the stock currently trading at a reasonable valuation, let’s see if it is the right time to grab a slice of Domino’s alongside Buffett.
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The bull case for investing in the Warren Buffett stock
Domino’s is a tech company that sells pizzas all over the world. In the last 12 months, Domino’s has increased sales to US$4.66 billion, up from US$3.6 billion in 2018. However, the company generated less than US$400 million from company-owned stores, while the rest was derived from franchise fees and royalties, ad sales, and supply chain revenue.
Moreover, it generates a sizeable portion of its sales from digital channels, and these technological investments have allowed it to create a formidable moat. Domino’s emphasized that its mobile application, artificial intelligence (AI)-powered delivery optimization, and GPS tracking system are driving operating efficiency and customer loyalty.
With more than 90% of franchised stores, Domino’s has a capital-light business model, enabling it to report an operating margin of over 18%.
Notably, the company stated that its growth story is far from over, as it remains focused on expanding into high-growth markets such as India and China. Over the years, Warren Buffett has invested in businesses that can scale efficiently, and this franchise-based model fits that bill perfectly.
Additionally, while third-party delivery apps have disrupted the food industry, Domino’s has stubbornly maintained its in-house delivery model. Once questioned by Wall Street, the strategy is proving successful as it gives the fast-food heavyweight complete control over the customer experience while protecting margins from delivery app fees.
A strong performance in Q3 of 2024
While several restaurants are struggling with falling traffic, Domino’s saw same-store sales rise by 3% year over year and retail sales rise by 6.6% year over year in the third quarter (Q3) of 2024. The company explained that its “Hungry for MORE” strategy, especially its focus on value offerings, is paying off.
Moreover, its reward program continues to attract new members and drive repeat purchases, while its partnership with Uber accounts for 2.7% of U.S. sales.
However, international markets face headwinds with Domino’s tempering estimates of same-store sales through 2025. Despite near-term headwinds, it has projected global retail sales growth in 2024 and is maintaining its 8% operating profit growth target.
Analysts tracking the restaurant stock expect adjusted earnings to expand from US$14.66 per share in 2023 to US$20 per share in 2026. So, priced at 22 times forward earnings, DPZ stock might seem expensive. However, its lofty valuation is supported by strong growth estimates.
Domino’s asset-light business allows it to pay shareholders an annual dividend of US$6.04 per share, translating to a forward yield of 1.4%. Its annual dividend expense totals roughly US$220 million and is easily covered by an estimated free cash flow of US$550 million in 2024. Domino’s has grown its dividends by 500% in the last decade, significantly enhancing the yield at cost.
For investors, Domino’s combination of market share gains, technological innovation, and strong unit economics might make it a tasty addition to their portfolios — just ask Warren Buffett.
