Warren Buffett is one of the legends of investing. His holding company, Berkshire Hathaway, has outperformed the US stock market by an average of 10% a year over the last eight decades. However, as Buffett himself has pointed out on several occasions, the sheer size of the fund, which recently reached a market value of $1 trillion, means that it is hard for him to find compelling investment opportunities. As a result, he has mainly used the huge amount of cash generated by the investments to buy back Berkshire’s shares. However, in November, his fund took a major stake in Domino’s Pizza. Should you follow suit?
It’s not hard to see why Berkshire likes Domino’s Pizza. The company seems consistent with all elements of Buffett’s “growth at a reasonable price” strategy. Firstly, it has a simple business model that you can understand: making takeaway pizza for both collection and delivery.
It has also built up a large amount of brand loyalty, giving it an enduring competitive advantage, or “economic moat”, that has enabled it to fend off competitors. This has allowed it to grow its sales consistently, to the extent that it is not only the world’s largest pizza chain, but also one of the most profitable, with a high return on capital employed.
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Should you buy the UK-listed Domino’s?
However, while the original company, which is the part that Buffett bought into, has a solid record, the UK-listed Domino’s Pizza Group (LSE: DOM) looks even more attractive. Domino’s Pizza Group is a master franchise of the US chain, which means that it has the rights to open stores in the UK and Ireland. It is on track to open its 1,400th store in 2025, with a 7% share of the overall market for takeaways. It has successfully invested heavily in all aspects of its digital operations in order to cut costs, stay ahead of its competitors and benefit from the boom in people ordering takeaways, which has continued despite the cost-of-living crisis.
However, the characteristic that makes the UK franchise more appealing than the original company is its valuation. While the US-listed outfit trades at 26 times estimated 2025 earnings, the UK franchise costs only 15 times next year’s profits. It also has a dividend of 3.45%, compared with the 1.5% yield for the American firm. And if you look at both firms’ records since 2018, the UK franchise has grown its sales slightly faster, with similar expansion in profits.
In addition to a solid business model and a reasonable valuation, Domino’s Pizza Group is benefiting from favourable market sentiment. The stock is above both its 50-day and 200-day moving averages and has eclipsed the overall market over one, three and six months. I would, therefore, suggest that you go long at £3 per 1p, at the current price of 338p. In this case, I would suggest putting the stop-loss at 208p, which would give you a total downside of £990.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
