To The Moon

$Domino's Pizza(DPZ)$

Domino’s Pizza has been making headlines recently for several reasons. They just released their latest quarterly earnings, announced a significant dividend increase, and on top of that, legendary investor Warren Buffett expanded his stake in the company by 86.5% in the most recent quarter. In this video, we’ll break down everything you need to know.

Historically, Domino’s Pizza has significantly outperformed the market, especially since 2010. To put things into perspective, Domino’s total return since then is close to 6,000%, while the S&P 500 sits around 4,125%. For comparison, Apple’s total return over that period is about 3,750%, and Microsoft’s is approximately 1,672%. This outstanding performance highlights Domino’s strong track record.

Of course, past performance is a backward-looking metric, so let’s shift our focus to forward-looking data. The global pizza market was valued at around $197 billion in 2024, and by 2033, it's projected to reach $500 billion, reflecting a compounded annual growth rate (CAGR) of 11%. This projected industry growth bodes well for Domino’s future.

Returning to Buffett’s investment, he initiated his position in Domino’s a couple of quarters ago and has continued adding shares in consecutive 13F filings. His estimated average purchase price is around $436 per share, and as of now, the stock is trading close to that range at approximately $449 per share.

Earning Overview

Now, let’s analyze the company’s latest earnings report. In Q4, Domino’s reported GAAP earnings per share of $4.89, narrowly missing expectations by $0.01. Revenue came in at $1.44 billion, up 3% year-over-year but missing estimates by $30 million. Despite these slight misses, there are key positive takeaways.

Operating income increased by 6.4% in Q4 and 7.3% for the full fiscal year, reflecting solid growth. Additionally, Domino’s reported an improvement in its gross profit margin, which has steadily increased over the past decade. The 10-year average gross profit ratio is about 35.56%, while in 2023, it was 39.3%, demonstrating consistent profitability.

Another crucial metric to consider is free cash flow (FCF), which reached $512 million in 2024, up from $485 million in 2023 and $388 million in 2022. A company’s stock price typically increases over the long run if its free cash flow grows, as FCF provides capital for reinvestment, debt repayment, mergers and acquisitions, share buybacks, and dividend payments.

Dividend

Speaking of dividends, Domino’s recently announced a substantial 15.2% dividend increase. The company has a strong history of dividend growth, with a five-year CAGR of 14% and a 10-year CAGR of 17.16%. This rapid dividend growth highlights its shareholder-friendly approach.

To understand the power of dividend growth, let’s compare Domino’s to AT&T. In 2015, AT&T had a starting dividend yield of 4.2%, but by 2025, its yield on cost was only 3.21%. In contrast, Domino’s had a much lower starting yield of 0.98% in 2015, but its yield on cost has now grown to over 6% due to consistent dividend increases. This demonstrates the long-term benefits of investing in companies with strong dividend growth, even if their initial yield is low.

Fundamental

Domino’s has also been aggressively repurchasing shares, reducing its share count by approximately 3.14% per year over the past five years. Fewer shares outstanding means higher earnings per share and greater per-share dividend payments, further benefiting long-term investors.

Looking at other financial metrics, Domino’s earnings per share have grown from $2.93 a decade ago to $16.83 in 2024, while its gross profit ratio and return on invested capital (ROIC) have also increased. The company consistently delivers an impressive ROIC of around 50%, well above the 20% threshold typically considered high quality.

However, one major concern with Domino’s is its high debt levels. The company’s debt-to-assets ratio stands at 2.93, meaning it has nearly three times more debt than assets. While this may raise red flags, Domino’s has historically maintained this capital structure. Its interest coverage ratio, which measures its ability to pay interest expenses, has remained steady around 4 to 4.5, indicating manageable debt levels.

Domino’s operates a capital-light business model, with 99% of its stores franchised. This means the company generates most of its revenue through royalties and fees rather than owning and operating stores. Despite the high debt levels, its strong free cash flow generation allows it to manage debt effectively while continuing to invest in growth.

In Q4, Domino’s experienced a slight slowdown in U.S. traffic, contributing to its revenue miss. However, analysts still expect solid growth in fiscal 2025. Given the pizza market’s projected 11% CAGR through 2033 and Domino’s position as the largest pizza chain globally, it stands to benefit from this long-term growth.

Valuation

From a valuation perspective, Domino’s trades at a forward price-to-earnings (P/E) ratio of 27.76, which is high but slightly below its five-year average of around 30. This suggests the stock is trading at a small discount relative to its historical valuation.

Using Bogle’s valuation model, which considers earnings growth, shareholder yield (dividends + buybacks), and multiple expansion/contraction, we can estimate potential future returns. If Domino’s achieves a 7.5% earnings growth rate, maintains a shareholder yield of 4.35%, and experiences a 20% decline in its P/E ratio over the next decade, the expected annual return is approximately 10%. Even in a more conservative scenario with 5.5% earnings growth, expected returns remain around 7.85%. In an optimistic scenario with 8.5% earnings growth and multiple expansion, returns could reach nearly 14% annually.

RIsk

The key risk to monitor is the interest coverage ratio. If it declines, it may indicate rising debt concerns. However, as long as Domino’s maintains its profitability, strong free cash flow, and shareholder-friendly policies, it remains an attractive long-term investment.

Conclusion

Warren Buffett’s continued investment, along with the company’s impressive financial performance and strong market position, makes Domino’s an interesting stock to watch over the next decade. While it has experienced volatility, long-term investors focused on dividend growth and free cash flow generation may find it a compelling opportunity.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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