Billionaire Warren Buffett's Bet On Domino's Pizza Looks Primed to Deliver Returns for Decades to Come

Warren Buffett's ability to consistently outperform the market has led many to think the billionaire investor has some sort of secretive edge. But the investing strategies Buffett and his top lieutenants over at Berkshire Hathaway employ are rooted in many simple concepts.

In other words, making money in the market does not require outsized risks, speculative opportunities, or chasing the next big megatrend.

Case in point: According to Berkshire's most recent 13F filing, Buffett's latest major investment is Domino's Pizza (NYSE: DPZ).

That's right, billionaires love pizza too! Let's look at how an investment in Domino's fits with Berkshire's investing philosophy, and assess whether now is a good opportunity to follow Buffett's lead.

Why Domino's Pizza makes a great addition to the Berkshire portfolio

Some institutional investors choose to own hundreds of different securities -- covering every major sector and myriad sub-markets within these industries. Berkshire is a bit different. Buffett and his team tend to invest in maybe 40 or 50 stocks at a time while holding onto their largest positions for years or even decades.

Two of Berkshire's most successful investments have been major consumer brands, including beverage maker Coca-Cola and electronics specialist Apple. But why these companies? Consider Coca-Cola's iconic red soda cans and Apple's coveted iPhone. These two products have helped both companies build unparalleled moats. The perception of Domino's isn't much different in my opinion, as it's pretty hard to think about pizza and not have the Domino's brand come to mind.

Another staple part of Buffett's philosophy is investing in businesses that generate steady cash flow. While free cash flow trends may be tougher to forecast for restaurant businesses, the big idea from the chart below is that Domino's has managed to grow its cash flow consistently over the course of the past decade.

Data by YCharts.

The company's rising cash flow has gone toward dividend increases too, which make up another pillar of Buffett's investing criteria.

A resilient business in a tough market

The restaurant industry is unbelievably intense. For national chains, customers expect quick, convenient service and affordable prices. One key metric for tracking a company's growth is same-store sales, which measures growth trends at existing locations. By excluding new restaurant openings, usually from the past year, same-store sales shed light on customer traffic and spending.

The table below breaks down Domino's same-store sales over the last year:

Data source: Investor relations.

Domino's has had a solid year with steady growth both inside and outside the U.S. But a skeptical investor may wonder if the company has only been able to generate this same-store sales growth through price hikes as inflation drives up the cost of materials and labor.

However, this is far from the case with Domino's.

On the latest earnings call, management said same-store sales in the U.S. have been experiencing rising transaction growth in addition to higher price mixes. It appears Domino's is seeing success from its rewards programs and marketing campaigns.

Why Domino's should keep delivering

The analysis below benchmarks Domino's against a peer set of other national restaurant stocks using the forward price-to-earnings (P/E) multiple. While there is a notable difference between Starbucks and the rest of this group, Domino's remains priced at a premium relative to its closest peer, Papa John's, and many other leading industry players.

Data by YCharts.

That said, I would argue that Domino's long-term track record warrants a premium valuation.

Even though Domino's might not offer exposure to high-growth opportunities in emerging areas like artificial intelligence (AI) or big data, there is still a lot to like about the company. Buffett's recent investment is just another signal to consider Domino's stock as a compelling buy-and-hold opportunity.

Should you invest $1,000 in Domino's Pizza right now?

Before you buy stock in Domino's Pizza, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Domino's Pizza wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $869,885!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 18, 2024

Adam Spatacco has positions in Apple. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Domino's Pizza, and Starbucks. The Motley Fool recommends Restaurant Brands International. The Motley Fool has a disclosure policy.