Three prospective motivations why Domino's Pizza shares might represent a lucrative investment opportunity for investors emulating Warren Buffett's strategic approach.
Three prospective motivations why Domino's Pizza shares might represent a lucrative investment opportunity for investors emulating Warren Buffett's strategic approach.
Every day, around breakfast time in Omaha, Nebraska, you might find Warren Buffett dropping by the local McDonald's. Known for his billionaire status and running the gigantic Berkshire Hathaway corporate empire worth a trillion dollars, Buffett often pops into the fast-food chain on his way to work. However, when it comes to Berkshire's most recent investment, it's not about Buffett's favorite burgers. Instead, it involves purchasing shares of Domino's Pizza (DPZ shedding -0.98%).
On November 14, Berkshire Hathaway revealed that it had invested in approximately 1.3 million shares of Domino's Pizza. Yet whether this decision originated from Buffett himself remains uncertain, due to his age (94) and entrusting more investment decision-making to his confidants.
Still, Buffett's investment criteria are well-known, and his close associates tend to share his approach to investing. Regardless of whether the decision to acquire Domino's Pizza stock was directly his, or someone else's, buyers can feel confident about Domino's Pizza stock fitting important criteria for Buffett.
Here are three aspects of Domino's Pizza stock that stand out, and could potentially attract Buffett:
1. The leader in pizza is simple to grasp
"Don't put your money in something you don't fully understand." -- Warren Buffett
To become a successful investor, you must become an efficient business analyst. But businesses can be complex, and Buffett acknowledges his inability to comprehend everything. That's why he only invests in businesses within his "circle of competence."
Fortunately, food service organizations are among the simplest businesses to grasp.
Domino's, with over 21,000 outlets worldwide, is the largest pizza enterprise in the world. Although it does not manage the majority of its outlets, most locations are primarily managed by franchisees. This simplifies the business operation, as Domino's concentrates on maintaining the popularity of its food and ensuring the profitability of its franchisees.
2. Domino's enjoys a competitive edge
"An outstanding business must preserve its enduring advantage." -- Warren Buffett
Many investors recognize Domino's as a pizza specialist. However, fewer are aware that the company generates most of its income from its supply chain services. For instance, during its third-quarter fiscal report in 2024, it reported over $650 million in supply chain revenue, which represented 60% of its total earnings.
Domino's leverages its supply chain to deliver dough, ingredients, and even food prep equipment to its franchisees. The size of its supply chain enables it to achieve scale efficiencies. Economically speaking, franchisees are not obligated to utilize its services, but they benefit from profit-sharing agreements, resulting in strong service adoption.
Basically, Domino's offers its franchisees a worthwhile perk here. This can boost satisfaction, aiding in keeping restaurants open and even encouraging new locations to open up. In my opinion, this is a concealed competitive advantage, or a "moat."
Firms with a competitive advantage often enjoy profit margins superior to their competitors. And in this case, Domino's does indeed boast a consistently superior operating margin compared to its main rival, Papa John's, as demonstrated in the chart below.
3. It rewards its shareholders
Indeed, Domino's is a sizable and straightforward business. Additionally, it possesses a competitive standing that supports strong profitability. But Buffett cares about finding companies that return cash to their shareholders.
Domino's dispenses a growing dividend, capturing Buffett's attention. However, it also buys back shares regularly. And as Buffett wrote in his 2022 letter to shareholders, "The math isn't rocket science: When the share count decreases, your stake in our various ventures increments."
Domino's Pizza stands out in an excellent position to generate long-term shareholder value for the reasons I have outlined above. Granted, there are other essential investment factors that should be considered, such as valuation and other metrics. Nonetheless, for the moment, it suffices to highlight that Domino's is the type of company that investors should consider. And I'm not shocked that Berkshire Hathaway perceived it as a fitting addition to its stock portfolio.
In light of Berkshire Hathaway's investment in Domino's Pizza, Warren Buffett's investment criteria, such as understanding the business, searching for simple yet profitable enterprises, and looking for companies that return value to shareholders, appear to be key considerations. Domino's Pizza, with its straightforward business model as a global pizza leader, competitive edge in supply chain services, and shareholder-friendly practices, aligns well with Buffett's approach to investing.