Would Warren Buffett buy Domino's shares?

Are Domino's shares actually a beaten-up opportunity?

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The Domino's Pizza Enterprises Ltd (ASX: DMP) share price has had a terrible 2024 to date, dropping by more than 30%, as shown on the chart below. Some investors may be wondering if this is an excellent buying opportunity. I'm going to use Warren Buffett's advice to help decide.

Warren Buffett is one of the world's greatest investors, he turned Berkshire Hathaway into one of the US' largest and strongest businesses. He was, and still is, brilliant at finding stocks that the market was undervaluing for their long-term potential, such as Coca Cola and American Express.

One of Buffett's most quoted investment pearls of wisdom could be applicable in this situation:

Be fearful when others are greedy and greedy when others are fearful.

I do think Buffett would be open to considering Domino's shares because Berkshire Hathaway is the owner of Dairy Queen, a fast food chain in the US. But, is the Domino's share price valuation attractive? I think there are a few factors that Buffett would consider.

Long-term expansion plan

Domino's noted in a recent investor presentation that in two of its biggest 'opportunity markets' of Germany and France, it currently covers just 30% of the country.

The company's growth outlook could be heavily influenced by how many more (profitable) stores it's able to open.

Domino's is looking to approximately double its total store count by 2033, which is 1.9 times its current market size. Achieving this scaling-up would be a significant positive for the Domino's share price, in my opinion.

In Australia and New Zealand, it's aiming for a total of 1,200 stores by 2027 or 2028. That growth would represent an increase of 1.3 times compared to its current size.

In Europe, the company aims to have 2,900 stores by 2033, which would equate to doubling in size.

In Asia, Domino's wants to reach 3,000 stores by 2033; this would see Domino's double in size in the region.

Domino's noted its current operating regions have a population of 418 million, which is 25% larger than the US.

The company noted store expansion is "important to the growth of franchise partners and Domino's Pizza Enterprises, but relies on improved unit economics". It points out that longer delivery distances reduce profitability for those orders. An additional store on the edge of the delivery zone would significantly reduce the delivery distance for those orders, increasing product quality and delivery times for the customer. It would also improve the existing store's unit economics.

Profit improvement

Domino's has revealed it's working on improving sales and unit economics to lift franchise partner profitability and store paybacks. Success here could be very useful for supporting the Domino's share price.

It's "applying proven approaches and expertise to rebuild unit economics." Management and franchise partners are implementing "best practice with tactics that resonate locally".

With a focus on growing volumes in every store, it's working on new products, growth in aggregators (like Uber), targeting certain order price points (such as 5 Euros), increasing digital spending to reach new customers, improving product quality and aiming for faster customer resolution.

The ASX share is also trying to lower food costs, reduce delivery costs through "increased efficiency", and reinvest savings initiatives into franchise partners.

For FY24, Domino's is targeting network savings of around $50 million through a restructuring, with one-third of that being shared with franchise partners.

Same-store sales growth

The performance of existing stores is important for Domino's and its partners too.

Domino's is targeting annual same-store sales (SSS) growth of between 3% to 6% over the next three to five years. It achieved this target in the first halves of FY19, FY20 and FY21, but it hasn't achieved it since. The FY24 first-half result experienced SSS growth of 1.25%.

If the company can achieve annual SSS growth of 3% from here, I think that would be a solid result considering its store count is expected to increase over the next decade.

Would Warren Buffett buy Domino's shares?

At Domino's much lower current share price, I think Warren Buffett would have a look at the company. The share price has actually been down approximately 75% since September 2021, making it a lot cheaper presently.

According to the estimates on Commsec, the company is now valued at 28x FY24's forecast earnings and 19x FY26's estimated earnings. With significant growth planned for the next decade, combined with ongoing population growth in key markets, I think Domino's shares could be an underrated buy.

American Express is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway, Domino's Pizza Enterprises, and Uber Technologies. The Motley Fool Australia has recommended Berkshire Hathaway and Domino's Pizza Enterprises. 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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