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Value Investor Daily #64
Warren Buffett's Latest Moves: Domino's Pizza (DPZ) and Pool Corp (POOL)
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As we recently covered, Berkshire Hathaway's latest 13F filing reveals two new additions to its investment portfolio: Domino's Pizza (DPZ) and Pool Corp (POOL).
These investments are somewhat atypical for Berkshire, which typically focuses on large, deeply undervalued companies. These decisions were likely made by Todd Combs or Ted Weschler, who have a history of investing in smaller-cap and more growth-oriented companies than Warren Buffett.
While these companies may not fit the traditional mold of significant, deep-value investments commonly associated with Berkshire, they possess strong, competitive positions that justify further examination.
We ran an analysis on both. Domino's earnings outlook was more certain. Let's look under the hood to understand why the company might have been selected.
Domino's Pizza (DPZ): A Steady Growth Story
The Business
Domino's Pizza is one of the world's largest pizza delivery chains, operating more than 20,000 stores worldwide. The company employs a franchise-based business model. It was one of the earliest adopters of digital innovation in the fast-food space, positioning itself as a leader in convenience-driven markets.
GuruFocus
The Numbers
Metric | Value |
|---|---|
Stock Price (Nov 2024) | $445 |
52-Week High | $542 |
All-Time High | $567 (December 2021) |
Decline From Peak | 21% |
Market Cap | $14.8 billion |
P/E Ratio (TTM) | 26 |
Dividend Yield | 1.29% |
Free Cash Flow Yield | 4.14% |
Despite a recent recovery, Domino's is still trading significantly below its peak price of $567 reached in late 2021. The company is facing significant competitive pressures at home and growth weakness abroad.
Value Analysis
Metric | Assumption |
|---|---|
Diluted EPS (TTM) | $16.27 |
10-Year Est. Growth Rate | 10% |
Terminal P/E | 22 |
Discount Rate | 10% |
Fair Value Estimate | $283 |
There is minimal margin for error here, and accelerated earnings growth will be crucial to justify its price. A reverse DCF analysis implies a 17% growth rate at the current stock price. The company has grown earnings by 19% annually for the past decade but only 11% in the last year.
Domino's benefits from its scale, brand recognition, and operational efficiency, however. So maybe they can pull it off.
Its digital-first approach and international expansion are key growth drivers. With the current valuation already pricing in significant growth, any price drop could offer long-term investors a more attractive entry point.
Strengths: Domino’s consistently has a high return on equity (ROE), currently at 56%. The company also has robust free cash flow, indicative of its operational efficiency. Its emphasis on digital ordering continues to give it a competitive edge, especially in delivery and takeout.
Challenges: The current high valuation leaves little margin for error. If international expansion stalls further, it will become a headwind for the multiple.
Concluding Thoughts
So why did Berkshire pick it up? Let’s think about it this way.
The product is relatively recession-proof.
It’s a global franchise brand down almost 30% from its peak last quarter.
Since its stock peaked in 2021, revenues have increased 13%, and operating income has increased 18%.
It’s a proven growth machine with domestic and international expansion opportunities
It’s highly capital efficient at 56% median ROIC in the last 10 years.
In short, this is closer to a Munger investment than a Buffett pick and was almost certainly chosen by his lieutenants. Charlie would agree that sometimes, you pay up for quality.
Thank you for reading today!
Happy Investing,
Value Investor Daily
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