Warren Buffett Just Bought Domino's Pizza Stock. Should You Follow Him?

Berkshire Hathaway‘s (BRK.A) (BRK.B 0.55%) quarterly 13-F filings always have a few surprises.

The updates show the stocks that Buffett’s conglomerate has bought and sold in the previous quarter. The biggest surprise this time around seemed to be Berkshire’s purchase of Domino’s Pizza (DPZ -1.27%), its biggest purchase in the quarter.

Berkshire bought 1,277,256 shares of the global pizza delivery chain, which were worth $550 million at the end of the quarter. Domino’s shares soared on the news after hours on Thursday, which is typical when Buffett’s company buys a new stock. Domino’s finished the after-hours session up 7.8%.

An unusual move for Buffett

Buffett has some experience with the restaurant industry. Berkshire Hathaway wholly owns Dairy Queen. At one point, Berkshire owned shares of McDonald’s, but it has otherwise avoided restaurant stocks in recent years, focusing on sectors like energy, banking, and technology. Buffett has also been a major investor in Coca-Cola, which counts restaurants as a key customer base.

In some ways, stocks like Domino’s Pizza have a lot of the qualities Buffett says he looks for in a stock. It has the leading brand in pizza delivery and a global presence in the industry. Because of its low prices, it’s arguably a recession-proof business as well, at least compared to most restaurant stocks. The pizza delivery concept is also well-established around the world, which should pave the way for continued growth.

13-F filings don’t come with explanations of purchases, so it’s up to observers to take an educated guess at why Berkshire bought Domino’s. To get some clues, let’s take a look at Domino’s value proposition after its latest earnings report.

Where Domino’s stands today

Domino’s was one of the best-performing stocks of the 2010s as the company reformulated its pizza recipe, and invested in tools like digital ordering and delivery trackers. More recently, the stock has struggled to break out of a range it’s traded in for the last few years.

While the streak of same-store sales growth has come to an end, recent results are solid. Same-store sales growth in the U.S. was up 3%, and international same-store sales growth ticked up 0.8%. Overall revenue in the quarter rose 5%.

The company, whose business is mostly franchised, continues to expand, adding 72 stores in the quarter to bring its total store count to 21,002. More than two-thirds of those locations are in international markets, though the company is growing in both domestic and international markets.

Domino’s pays a modest dividend, yielding 1.3%, and the company has been using excess cash to buy back shares.

Is Domino’s a buy?

Buffett-watchers know that the Oracle of Omaha is a committed value investor. While he prioritizes buying a good company, Buffett also aims to buy at a good price.

On that account, the Domino’s purchase seems questionable. The stock trades at a price-to-earnings ratio of 27, which seems pricey for a mostly mature company with modest growth prospects, and the stock is about to get more expensive as it went up after the Berkshire acquisition.

Domino’s is still down from its pandemic-era peak. The stock has traded up and down based on earnings beats and misses in the last few years, and its relatively high valuation seems to be left over from the last decade when the business was growing significantly faster.

Overall, while Domino’s is the leader in pizza delivery and the business should continue to grow over the long term, at the current valuation and growth rate, investors can find better opportunities elsewhere in the restaurant industry.