Three compelling reasons to invest in Domino's Pizza stocks without delay.
Folks can argue about their favorite toppings or preferred crust style, but it's tough to find someone who doesn't enjoy pizza. For over six decades, Domino's Pizza (DPZ, up by 1.74%) has transformed this universal fondness into a renowned brand and prosperous franchise business worldwide.
After making its public debut at $14 per share in 2004, the stock has skyrocketed by an impressive 7,058%, with a continuous 12-year streak of yearly dividend increases. In fact, it's currently trading 20% below its 52-week high at present.
So why should you consider Domino's Pizza stock as a tempting investment option? Here are three reasons:
1. Recipe for lasting triumph
Emerging from an era of exceptional growth during the pandemic's peak, Domino's is currently navigating a more complicated economic climate. Rising costs and budget-conscious customers' reluctance to pay higher prices have impacted company sales and earnings, particularly during 2022 and 2023.
Metric
In response, Domino's introduced the "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. This strategy outlines a series of organizational reforms designed to kick-start growth and boost profitability. Initial results indicate this plan is gaining traction.
2024 estimate
In the third fiscal quarter (ending Sept. 8), U.S. Domino's store sales improved by 3% year-over-year, marking a turnaround from the 0.6% decline reported in Q3 2023. Enhanced profit margins have resulted in a 16% boost in earnings per share (EPS) through the first nine months of the year, compared to the 2023 period.
2025 estimate
Management credits their Hungry for MORE initiatives, such as the return of aggressive discounts and menu innovations, with allowing Domino's to seize market share within the quick-service restaurant (QSR) pizza market this year.
Longer-term (2026-2028) estimate
The favorable trends suggest that sustainable growth can persist. Domino's predicts a 6% increase in annual global retail sales for both 2024 and 2025, with targets for double-digit growth in the longer term (around 7% or more). The company also foresees operating income growth outpacing revenue gains 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% |
Annual global retail sales growth
2. Warren Buffett becomes an investor
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Domino's Pizza boasts a straightforward yet highly profitable business model. As the company develops internationally by adding new franchisees, revenue and cash flow expand. With expectations for consumer spending to surge as the Federal Reserve cuts interest rates, this setup appears promising.
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Billionaire investor Warren Buffett and his Berkshire Hathaway team must have been drawn to something compelling about this established industry leader. In the most recent financial report, the investment conglomerate acquired 1,277,256 shares of the global pizza delivery chain, increasing its ownership to a mere 3.7%.
7%
Although Berkshire Hathaway hasn't disclosed its rationale behind the latest Domino's Pizza investment, the decision at least bolsters my confidence in the company's sturdy fundamentals and optimistic long-term prospects.
3. Irresistible value in Domino's shares
Annual income from operations growth
Buffett is renowned for investing in high-quality enterprises with strong management teams, which he deems undervalued by the market. There's a strong argument that Domino's Pizza fits this description.
8%
Shares are currently trading at 26 times the 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 earnings multiple of about 34. This implies the stock is underpriced, in my opinion.
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The essential factor to acknowledge is that the company's earnings are mainly driven by revenue from high-margin royalties and franchise fees, which generate substantial free cash flow. As global sales regain speed, Domino's should see its valuation premium converge toward its historical average, which should serve as a catalyst for the stock's price increase.
8%
Is it the right time to purchase Domino's stock?
I'm optimistic about Domino's Pizza and believe that all components are in place to reward investors from 2025 and beyond. Those seeking a proven consumer goods titan at a bargain can find a spot for the stock in their diverse investment portfolio today.
Considering Domino's Pizza's promising business model and Warren Buffett's recent investment, you might want to contemplate investing in the company's shares. The stock is currently trading at a lower price-to-earnings ratio compared to its 10-year average, indicating potential undervaluation in the market. Furthermore, as Domino's continues to grow globally, it could provide substantial returns for investors in the future.
