New
3 Things To Know About Domino's Pizza Stock Before You Buy
Domino's (NYSE: DPZ) stock found its way back onto many investors' radars last month after Warren Buffett's Berkshire Hathaway disclosed that it had added the pizza purveyor to its portfolio. News that Buffett is buying any stock tends to put a bright spotlight on it, and that attention can sometimes drive the share price higher.
That's partly because Berkshire Hathaway has enough cash on its books that it can comfortably purchase entire companies outright, and partly because so many investors trust Buffett's judgment. The conglomerate's returns have trounced the market over the long term, after all.
Yet it's never a good idea to blindly follow another investor into a stock without clearly understanding what you are purchasing. So let's look at whether you might want to follow Berkshire's lead and pick up shares of this fast-food giant. Here are three things to know about Domino's stock as you consider whether to buy.
1. Domino's is exhibiting better growth lately
2024 hasn't been a great year for most businesses in the food service industry. The lingering impacts of high inflation in 2022 and 2023 have left people more hesitant to spend, and fast-food giants are choosing between growing their traffic or their profit margins. McDonald's CEO Chris Kempczinski, for example, revealed in October that his chain's U.S. sales were flat in Q3 as consumers "continue to be mindful about their spending."
Domino's is turning in better performances. Comparable-store sales in the third quarter rose 5%. Comps were up nearly 7% over the first three quarters of the year compared to a 3% uptick in the prior-year period. "Our ... strategy is working despite a pressured global marketplace," Domino's CEO Russell Weiner said in late October. Keep in mind that this rebound follows three years of below 4% annual comps growth. However, the company is still on an improved expansion path.
2. Domino's maintains an efficient business
Successful fast-food chains are masters of squeezing profits out of their product sales, since value is a core competitive advantage. Domino's isn't nearly as efficient on this score as McDonald's, which relies heavily on rental and franchise fees to boost its margins. However, the pizza delivery chain still has one of the most profitable businesses in its industry. That's largely a function of its tiny store footprint that focuses entirely on carry-out and delivery orders. Its menu isn't complicated, either, requiring relatively few ingredients and simple preparation methods. All of that helps it keep its costs and prices low.
MCD Operating Margin (TTM) data by YCharts.
These factors have combined to give Domino's an operating profit margin of almost 19%, above such peers as Chipotle Mexican Grill and Wendy's. Buffett might also be attracted to the pizza giant's ample cash flow generation, which produces resources it can redirect toward high-return areas like its international expansion.
3. Domino's stock is only right for some types of investors
Following Berkshire Hathaway into Domino's stock might depend most on whether you think its shares represent an appetizing deal. Following their November rally, shares are priced at about 28 times earnings, which is within the range that investors have seen over the past few years. The same goes for its price-to-sales valuation of 3.5. Faster-growing Chipotle, by comparison, is priced at a steep 8.3 times sales.
Domino's seems fairly priced in that context. On the positive side, it has a good chance of winning more market share in the highly competitive fast-food industry, especially in promising international markets like South America. And the chain is positioned to fare well even during economic pullbacks when consumers focus more on finding food values.
On the other hand, the company could struggle to produce sustainably strong earnings growth as more competitors dive into home delivery. That would limit investors' returns from here. It's easy to see why Buffett might like this efficient, cash-generating business. But Domino's stock won't be a perfect fit for all investors' portfolios.
Should you invest $1,000 in Domino's Pizza right now?
Before you buy stock in Domino's Pizza, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Domino's Pizza wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $822,755!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of December 9, 2024
Demitri Kalogeropoulos has positions in Berkshire Hathaway, Chipotle Mexican Grill, and McDonald's. The Motley Fool has positions in and recommends Berkshire Hathaway, Chipotle Mexican Grill, and Domino's Pizza. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
