Domino’s Pizza (DPZ) has struggled to record gains in recent years, with its stock currently trading at the same level as in September 2020. Nevertheless, Domino’s has been growing its revenues and earnings per share (EPS) at a rapid pace. Both figures are once again expected to hit record highs this year. I believe that this combination of robust growth and Warren Buffett’s recent investment at what appears to be an attractive valuation forms a compelling Buy case for DPZ stock.
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Warren Buffett’s Stake in DPZ Stock
The bull case for DPZ stock was laid out in Berkshire Hathaway’s (BRK.B) most recent 13F filing, which disclosed a new position in Domino’s Pizza. Warren Buffett’s conglomerate bought 1,277,256 shares, or about 3.65% of the fast-food company. I find this to be a substantial stake, especially since Buffett has been actively divesting core holdings in recent months. As a reminder, Berkshire’s cash position recently soared to $325 billion, bolstered by significant sales of Apple (AAPL) and Bank of America (BAC) stocks. Thus, Buffett’s decision to acquire a sizable stake in DPZ stock indicates that he sees compelling value in Domino’s at current levels.
Beyond the stock’s valuation, Buffett’s investment likely reflects the appeal of Domino’s highly scalable and efficient business model. With 99% of its restaurants franchised, Domino’s collects a 5.5% royalty on franchisees’ topline sales, resulting in a business that can scale very fast with little to no capital expenditures. This frictionless structure allows Domino’s to expand without incurring high costs, generating steady, high-margin royalty income.
Consider that the company’s earnings per share (EPS) has grown at a compound annual growth rate (CAGR) of 19% over the past decade, demonstrating the power of this model. I think that such a strong track record of earnings growth, combined with Domino’s recession-proof and highly scalable franchise system, likely influenced Buffett’s investment decision.
Domino’s Growth Potential
The growth potential of Domino’s is another reason to rate the stock a Buy. Buffett’s decision to invest was also likely powered by Domino’s excellent performance. Specifically, Domino’s delivered outstanding Q3 results, setting the stage for another year of record revenues and EPS. Sales growth was driven by the company’s tried-and-tested formula: opening new stores and maximizing comparable sales.
In Q3 alone, Domino’s saw global net store growth of 72 locations and achieved U.S. same-store sales growth of 3%, while international comparable sales increased by 0.8%. According to management, these gains were fueled by initiatives under the “Hungry for MORE” strategy, emphasizing value offerings and promotional pricing, which helped grow the order count and sustain customer loyalty.
Domino’s highly scalable business model contributed to margin expansion. U.S. company-owned store gross margins improved by 100-basis points year-over-year, and the supply chain gross margin expanded by 50-basis points during this period. This supported EPS growth, which came in at $4.19 per share. Based on Domino’s year-to-date performance and management’s outlook, consensus EPS estimates project $16.72 for the year, implying a growth rate of 14% over Fiscal 2023 and a new record for the company. Revenue for Fiscal 2024 is projected at $4.75 billion, also a record.
DPZ Stock’s Attractive Valuation
DPZ stock also has an attractive valuation, making it a Buy in my opinion. As mentioned, Buffett likely saw substantial value in Domino’s, given that he bought it during a period of large equity sales, which its current valuation reflects. At its current levels, shares are trading at just under 26 times this year’s expected EPS of $16.72. I believe this valuation is attractive, considering Domino’s strong EPS growth and ongoing double-digit bottom line growth.
Domino’s also has a recession-proof business model, allowing it to weather challenging economic periods while maintaining strong profitability. This unique blend of resilience and scalable growth means Domino’s deserves a premium valuation that the present multiple doesn’t reflect. In fact, Warren Buffett’s recent actions—selling other overvalued stocks while buying into Domino’s—validates my view as it suggests that Berkshire Hathaway also sees the current valuation as an attractive buying opportunity.
Is DPZ Stock a Buy?
Wall Street analysts appear optimistic on DPZ stock. The stock has a consensus rating of Moderate Buy, supported by 16 Buy ratings, eight Hold ratings, and only one Sell rating in the past three months. With an average price target of $476.79, Domino’s appears to have 6.69% upside from current levels.
If you’re uncertain which analyst to follow if you want to buy and sell DPZ stock, check out Chris O`Cull from Stifel Nicolaus. He is the most accurate and most profitable analyst covering the stock (on a one-year timeframe), boasting an average return of 24% per rating and an 88% success rate.
Read more analyst ratings on DPZ stock
Conclusion
In conclusion, I believe that Domino’s Pizza presents a compelling investment opportunity bolstered by its robust revenue and EPS growth, resilient franchise model, and attractive valuation. Warren Buffett’s recent purchase reinforces the stock’s appeal and validates that the stock’s current price levels are attractive. With projections for record sales and earnings this year, and a proven track record of navigating economic downturns, Domino’s stands out as a high-quality, undervalued asset poised for long-term success.
