Yes, the Oracle of Omaha is stepping down. But I want to look at one of his investments from late last year. Domino's (DPZ 0.49%), owned by Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), is the biggest pizza chain in the world, and makes for a compelling investment.
My general take here is that its longtime trends of strong market-beating performance outweigh the slower turnover in the latest quarters. Domino's has proven to be a solid buy over the long run. Warren Buffett's stamp of approval says a lot about the company's position within pizza, as he looks for businesses that he views as having a lot of "moat" or barrier to entry/brand power.
Relative to its performance record, Domino's seems to be offering an opportunity. The stock has been underperforming the market recently, while over the long term, it greatly outperforms the S&P 500. Part of this is attributable to a slow first quarter. Q1 sales saw a same-store sales decline in the U.S. of 0.5%, while international sales increased 3.7%. Overall, CEO Russell Weiner seemed fairly optimistic about the rest of the year. There are a few key reasons for this.
What's on the way?
Two words: Stuffed crust. Why Domino's waited so long to join the club on stuffed crust is beyond me, but it's here! Domino's is currently a story of the first half of the year, versus the second half. Things were a bit slow through Q1, but new initiatives -- including stuffed crust, and deals with Uber and DoorDash for delivery -- stand to create some momentum in the second half of the year.
Image source: Getty Images.
Pizza is a straightforward business, and the company's franchise model means that it can avoid much of the costs, while taking in a piece of the pie (literally). The recent slowness is a long-term opportunity. Pizza is a low-cost business with major upside potential, especially for the world's largest pizza chain. It carries pricing leverage over the industry, which challenges competitors like small shops, and even larger competitors like Papa John's (NASDAQ: PZZA).
When you look at the business over time, it's steady. With the exception of 2023, this company grows at around 4% to 5% per year, and has been improving earnings over the last five years. One of the things I really like is how Domino's has been driving down its share count over the last five years, creating more value for shareholders. Shares have gone from 39.64 million diluted shares in 2020 to 34.99 million in 2024.
In the spirit of what Warren Buffett often preaches, this is a business with a powerful brand. When you order Domino's, you know what you're getting. This is not to mention the burgeoning variety of other items that are now on its menu.
Estimates
Over the last five years, this has been an underperforming investment relative to the broader market. Domino's created returns of 29.16%, while the S&P 500 had gains of 106.28%. At first glance, that might give people a nervous approach to something like Domino's. Overall, I think the long-term trend here vastly outweighs the short term. Analyst estimates are positive for the stock, with annual earnings expected to increase 27.26% from fiscal 2024 earnings to $21.24 per share in fiscal 2027. For a pizza business, I like this rate, and think it will continue the steady nature upon which this investment is based.
If you have the patience, Domino's has a few things in the pipeline that could spur new life into the stock. DoorDash delivers a lot of food, and adding Domino's to the list makes a lot of sense. Stuffed crust almost feels like it should already have been on the menu, but better late than never! Time will tell, but I think Berkshire Hathaway has it right on this one.
