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When Warren Buffett’s Berkshire Hathaway reveals a brand new place, traders take discover. The Oracle of Omaha’s current US$550 million guess on Domino’s Pizza (NASDAQ:DPZ) might sound modest by Berkshire’s requirements, however it speaks volumes concerning the pizza big’s potential.
Whereas many view Domino’s as simply one other fast-food chain, the worldwide powerhouse has remodeled right into a technology-driven supply machine serving spectacular shareholder returns. Since January 2015, Domino’s has returned greater than 400% to shareholders in dividend-adjusted positive factors.
With the inventory presently buying and selling at an inexpensive valuation, let’s see if it’s the proper time to seize a slice of Domino’s alongside Buffett.
The bull case for investing within the Warren Buffett inventory
Domino’s is a tech firm that sells pizzas all around the world. Within the final 12 months, Domino’s has elevated gross sales to US$4.66 billion, up from US$3.6 billion in 2018. Nevertheless, the corporate generated lower than US$400 million from company-owned shops, whereas the remaining was derived from franchise charges and royalties, advert gross sales, and provide chain income.
Furthermore, it generates a sizeable portion of its gross sales from digital channels, and these technological investments have allowed it to create a formidable moat. Domino’s emphasised that its cellular utility, synthetic intelligence (AI)-powered supply optimization, and GPS monitoring system are driving working effectivity and buyer loyalty.
With greater than 90% of franchised shops, Domino’s has a capital-light enterprise mannequin, enabling it to report an working margin of over 18%.
Notably, the corporate said that its development story is much from over, because it stays centered on increasing into high-growth markets comparable to India and China. Over time, Warren Buffett has invested in companies that may scale effectively, and this franchise-based mannequin matches that invoice completely.
Moreover, whereas third-party supply apps have disrupted the meals trade, Domino’s has stubbornly maintained its in-house supply mannequin. As soon as questioned by Wall Avenue, the technique is proving profitable because it offers the fast-food heavyweight full management over the client expertise whereas defending margins from supply app charges.
A powerful efficiency in Q3 of 2024
Whereas a number of eating places are fighting falling visitors, Domino’s noticed same-store gross sales rise by 3% yr over yr and retail gross sales rise by 6.6% yr over yr within the third quarter (Q3) of 2024. The corporate defined that its “Hungry for MORE” technique, particularly its concentrate on worth choices, is paying off.
Furthermore, its reward program continues to draw new members and drive repeat purchases, whereas its partnership with Uber accounts for two.7% of U.S. gross sales.
Nevertheless, worldwide markets face headwinds with Domino’s tempering estimates of same-store gross sales by 2025. Regardless of near-term headwinds, it has projected world retail gross sales development in 2024 and is sustaining its 8% working revenue development goal.
Analysts monitoring the restaurant inventory count on adjusted earnings to broaden from US$14.66 per share in 2023 to US$20 per share in 2026. So, priced at 22 occasions ahead earnings, DPZ inventory might sound costly. Nevertheless, its lofty valuation is supported by robust development estimates.
Domino’s asset-light enterprise permits it to pay shareholders an annual dividend of US$6.04 per share, translating to a ahead yield of 1.4%. Its annual dividend expense totals roughly US$220 million and is well lined by an estimated free money movement of US$550 million in 2024. Domino’s has grown its dividends by 500% within the final decade, considerably enhancing the yield at price.
For traders, Domino’s mixture of market share positive factors, technological innovation, and powerful unit economics would possibly make it a tasty addition to their portfolios — simply ask Warren Buffett.
