Warren Buffett's Berkshire Hathaway has created tremendous wealth for shareholders, and a key component of those returns stems from buying shares of strong businesses at attractive prices relative to their estimated worth. The company held an equity portfolio worth $271 billion in the third quarter, and one of its new buys was Domino's Pizza (DPZ -0.69%).
It's a small position for Berkshire, making up less than 1% of the company's stock portfolio. Given the small stake, it was probably chosen by one of Buffett's investing deputies -- Todd Combs or Ted Weschler -- who manage a portion of Berkshire's stock investments. Either way, Combs and Weschler were handpicked by Buffett, so they possess similar investing chops to the legend himself.
Domino's Pizza is an interesting pick since the fast food industry is very competitive. But over the last 15 years, the stock has delivered an astonishing return of 5,500%, which indicates a formidable competitive moat that could make the stock an excellent buy after the recent dip.
Domino's has tremendous brand presence
Pizza is not a fast-growing industry, but Domino's is growing faster than the average pizza chain. Through the first three quarters of fiscal 2024, Domino's retail sales were up 6.6% year over year, outpacing the rest of the market, which grew less than 2%.
Domino's competitive advantage centers around its ubiquitous brand presence. It has more than 21,000 stores in over 90 markets worldwide. This large store footprint generates a lot of sales volume, with the company's trailing-12-month sales coming to nearly $19 billion across company-owned and franchised stores.
Moreover, its model of earning royalties and fees from its franchisees helps pad the bottom line. Domino's has seen its profit margin steadily rise over the last 15 years and recently hit a new high of 12%, which is in line with the S&P 500 average.
A double-digit profit margin in a crowded pizza industry reflects a strong brand since there are many brands selling essentially the same product and competing mostly on price. However, a key advantage for Domino's lies in its large store base, which allows the company to win over a lot of customers that live in close proximity to each store.
As long as the business can price its product to earn a healthy profit, which Domino's is clearly doing, shareholders should be well rewarded. Over the last 10 years, the company delivered compound annual revenue growth of 9.5% and earnings per share growth of 19%.
Is the stock a buy?
The stock has rebounded sharply since hitting a low of $289 in 2023. It soared to a 52-week high of $542 before pulling back to its recent share price of $430. From a valuation perspective, Domino's shares are as cheap as they have been in 10 years, so Berkshire's investing gurus certainly chose an opportunistic point to start a position.
DPZ PE Ratio data by YCharts
Over the last decade, the stock's price-to-earnings (P/E) ratio has fluctuated between a low of 22.3 (2023) and a high of 46.8 (2017). The current P/E sits at 27.5 at the time of writing, which seems fair for the company's growth prospects.
Wall Street analysts expect Domino's to report annualized earnings growth of 10% over the long term. While this level of growth won't deliver market-smashing returns, the company's competitive position and record of profitable growth give Berkshire a level of certainty about its future growth trajectory. The stock can outperform the market averages in the coming years if it outperforms earnings estimates.
I wouldn't pile into the stock expecting big returns, but Domino's Pizza should be a rewarding long-term investment.
