Warren Buffett's Berkshire Hathaway recently released its latest 13-F filing to the Securities and Exchange Commission (SEC). Buffett's team has been a net seller of stocks in recent quarters. Hence, it may have come as a surprise to many analysts when it opened a position in Domino's Pizza (NYSE: DPZ) stock.
The news led to a temporary bump in the average share volume of Domino's stock and its stock price. However, investors buy individual stocks for many reasons, and not all billionaire stock picks are suitable for the average investor. Thus, investors need to take a closer look at Domino's before deciding whether to feast on this pizza stock.
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Domino's Pizza explained
Domino's is the world's largest pizza company. It operates nearly 21,000 locations in more than 90 countries and serves about 1 million customers daily. Franchisees own around 99% of its locations.
The company has focused on expansion since after its founding in Ypsilanti, Michigan, in 1960. Nonetheless, it waited until 2004, when it had grown to approximately 7,500 global locations, before launching its initial public offering (IPO) in July of that year. Since then, it has produced a total return of nearly 7,000%, far outpacing the S&P 500.
Although the company has not outlined a specific total growth goal in its reports, it believes it can still add thousands of new locations worldwide. It had previously guided for approximately 1,100 net new stores annually, including about 175 in the U.S.
Berkshire and Domino's Pizza
Although the SEC requires Berkshire Hathaway to issue a 13-F filing of its stock holdings every quarter, it bears no obligation to explain its purchases and sales, and the company's filings offer little insight as to why Buffett's team has chosen to invest in this stock.
The most likely explanation is that Berkshire bought the stock following the company's earnings for the second quarter of fiscal 2024 (ended June 16) on July 18. At that time, Domino's stock fell by 14% in the following trading session as the company scaled back forecasts for international store growth. From that point, the stock made few net gains before beginning a recovery in September.
Moreover, the company reported only 72 net store openings in the fiscal Q3 (ended Sept. 8), indicating it is no longer a fast-growing company. Plus, in fiscal Q2, Domino's suspended guidance on 1,100 annual net new stores globally, which likely rattled some investors.
The lower stock price has taken the price-to-earnings (P/E) ratio down to 27. Nonetheless, investors are likely to perceive that multiple as expensive. In the first three quarters of fiscal 2024, revenue of almost $3.3 billion rose 6% yearly, a level unlikely to inspire investors to pay a premium.
Domino's also reported $415 million in net income, which rose 15% over the previous year as other income and interest income grew at a faster pace. Still, analysts expect a profit increase of only 6% next year, a significant slowdown from the current year.
Furthermore, Domino's shareholders earn $6.04 per share in yearly dividends. However, with a dividend yield of 1.4%, it barely beats the 1.25% average for the S&P 500. Such results leave investors without an obvious reason to take an interest in this stock.
Should you follow Buffett's team into Domino's Pizza stock?
Considering Domino's as a company and its financials, most investors should likely pass on Domino's stock.
Admittedly, Domino's will likely earn positive returns for its shareholders over time. Nonetheless, average investors have to remember that they are not Buffett or his team.
Berkshire's massive size often means it has fewer opportunities to find stocks with market-beating returns. Moreover, average investors should remember that a bank can only preserve a relatively small amount of liquidity. Since it already owns $288 billion in Treasury bills,Berkshire may have bought this stock simply to protect its wealth and collect a modest dividend.
As a company, Domino's will probably continue a slow, steady expansion. However, as an investment, average investors can probably earn higher returns in other stocks.
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Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway and Domino's Pizza. The Motley Fool has a disclosure policy.
