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Why Warren Buffett might avoid Domino’s Pizza Enterprises Ltd (ASX:DMP) shares

Domino’s Pizza Enterprises Ltd (ASX: DMP) is an operating pizza chain comprising both franchisee owned and company owned corporate stores. From 2008 to 2016, the Domino’s share price rose from $3 to just under $77. 

Whilst the share price has since fallen 31%, Domino’s has grown its operations year on year. Since 2008, total sales have increased 291%, whilst earnings per share have risen 781%.  

Currently, Domino’s has a market capital of $4.5 billion and a P/E ratio of 34.5. With book value per share of only $4.67, the market is suggesting that growth will continue. 

Growth  

By 2020, earnings per share (according to analysts’ forecasts) are projected to increase by 47.5%, whilst dividends will grow by 47%. This means that if you bought on today’s price, you would secure a forward P/E ratio of 23.2 and a dividend yield of 3.1% 

These projections are underpinned by the growth of operating stores. Domino’s is expecting to more than double its 2,200 stores across its European, Japanese and Oceania network. By June 2025, the pizza chain intends to have 4,650 stores in operation. 

Whilst the projected growth is impressive, it appears to be over-accounted for on the current price.

The majority of large brokers have labelled Domino’s as a “hold”. However, there are some that are expecting bigger and better things. 

Domino’s holds approximately 25% of the local pizza market and is doing everything in its power to extend its position. From website developments, personalised marketing campaigns and drone delivery services, Domino’s is searching for competitive advantages.

It is a historically strong performer, an easy to understand business model and is constantly searching for competitive advantages. Whilst meeting the majority of Buffett’s criteria, the comparatively high price reduces the margin for error. 

Foolish takeaway  

In my opinion, if the ‘Oracle of Omaha’ was looking at buying Domino’s shares, he’d wait until Mr. Market had a bad day. Although, it’s also possible that Domino’s might not pass Buffett’s value and quality investing style at all.

It might be worth having a look at the closet thing Australia has to an investment conglomerate in Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), or the Buffett-owned Insurance Group Australia Ltd (ASX:IAG) if you really want to follow Buffett’s investment style more closely.

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Motley Fool contributor Matt Breen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of Insurance Australia Group Limited. The Motley Fool Australia has recommended Domino's Pizza Enterprises Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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