People can debate their favorite toppings or preferred style of crust, but it’s hard to find someone who doesn’t love pizza. For more than 60 years, Domino’s Pizza(NYSE: DPZ) has translated that universal constant into a globally recognized brand and wildly successful franchise business.
Since the company’s initial public offering in July 2004 at $14 per share, the stock has returned 7,058%, including an ongoing 12-year streak of consecutive annual dividend increases. Indeed, there’s a lot to like about this restaurant industry pioneer which looks to be on sale, trading 20% below its 52-week high at the time of writing.
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Here are three reasons Domino’s Pizza stock could be a tasty buy right now.
After emerging from a period of record growth during the pandemic’s height, Domino’s is navigating a more challenging macroeconomic environment. Rising costs, combined with budget-conscious consumers’ resistance to higher pricing, have pressured company sales and earnings, particularly between 2022 and 2023.
In response, Domino’s announced its “Hungry for MORE” strategy last year. The acronym “MORE” stands for Most Delicious Food, Operational Excellence, Renowned Value, and Enhanced by Best-in-Class Franchisees and Team Members. The strategy encompasses a series of organizational steps to jump-start growth and accelerate profitability. The recent results suggest the plan is working.
In the fiscal third quarter (ended Sept. 8), Domino’s U.S. store sales climbed by 3% year over year, reversing the 0.6% decline in Q3 2023. Improving margins have translated to a 16% increase in earnings per share (EPS) through the first nine months of the year, compared to the period in 2023.
Management is highlighting how its Hungry for MORE efforts, including a return of aggressive promotions and menu innovations, have allowed Domino’s to capture market share within the quick-service restaurant (QSR) pizza category this year.
The trends are a good sign that profitable growth can continue. Domino’s expects annual global retail sales to increase by approximately 6% in both 2024 and 2025, while targeting a stronger longer-term performance of 7% or more. The company also sees an upside in margins, allowing income from operations to outpace the top line over time.
Metric
2024 estimate
2025 estimate
Longer-term (2026-2028) estimate
Annual global retail sales growth
6%
6%
7%
Annual income from operations growth
8%
8%
8%
Data source: Domino’s Pizza.
The beauty of Domino’s Pizza is its simple yet highly profitable business model. As the company expands globally by signing up new franchisees, earnings and cash flow are leveraged higher. That’s a great setup with an expectation for consumer spending to pick up as the Federal Reserve cuts interest rates.
Billionaire investor Warren Buffett and his team at Berkshire Hathaway must have also found something compelling about this proven industry leader. According to a recent corporate filing, the financial conglomerate purchased 1,277,256 shares of the global pizza delivery chain during the last quarter, and now holds a 3.7% stake.
While the exact reasoning behind Berkshire’s newest investment in Domino’s Pizza is undisclosed, the move at least reaffirms my confidence in the company’s strong fundamentals and positive long-term outlook.
Image source: The Motley Fool.
Warren Buffett is renowned for buying high-quality companies with good management teams he believes are undervalued by the market. That may very well be the case with Domino’s Pizza.
Shares are trading at 26 times its 2024 consensus EPS of $16.71, as a forward price-to-earnings ratio (P/E). Notably, this level is well below the company’s 10-year average for the earnings multiple of closer to 34. This suggests the stock is a bargain, in my opinion.
The key factor to recognize is that the company’s earnings are in large part driven by high-margin royalties and franchise fees, which generate significant free cash flow. As the pace of global sales rebounds, Domino’s should see its valuation premium converge higher toward the historical average as a catalyst for the stock to rally higher.
I’m bullish on Domino’s Pizza and believe all the pieces are in place for the company to reward shareholders into 2025 and beyond. Investors hungry for a proven consumer goods leader at an attractive price can find a place for the stock today within a diversified portfolio.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Domino’s Pizza. The Motley Fool has a disclosure policy.
