Shares of this leading restaurant chain are on sale, but they probably won’t be for long.
Like bargains? Most people do. After all, why pay more when you can pay less? The idea even applies to investing — the cheaper the stock is when you buy it, the bigger your potential returns.
With that backdrop, investors shopping for a new growth stock to add to their portfolio may want to consider stepping into Domino’s Pizza (DPZ -0.37%) while shares are down 20% from last June’s peak. That may be all the discount you’re going to see for a while.
Domino’s Pizza? Really?
It’s admittedly not a top-of-mind growth stock like Nvidia and Amazon are. Indeed, even when it’s firing on all cylinders, it may never dish out the double-digit growth many technology powerhouses are delivering these days.
But what Domino’s Pizza lacks in raw growth potential, however, it makes up for in consistency and predictability.
The pizza chain has been in business since 1960 and grown to more than 21,000 global locations, making it one of the biggest and most beloved names in the restaurant industry. Pizza is also one of the world’s most popular foods with each region putting its own spin on the dish. That explains why roughly half of Dominio’s sales come from outside the U.S. where pizza is just as popular as it is here.
And market research outfit Technavio believes the global pizza market will grow at an annualized pace of nearly 7% through 2029, outpacing the overall restaurant industry.
But is Domino’s Pizza positioned to capture some of that growth? Yes, it is.
Why Domino’s Pizza stock is the best option
Although bigger doesn’t always mean better in investing, in this case, Domino’s dominant size provides it with the fiscal wherewithal to expand aggressively. Its $5.0 billion in debt may seem like a lot for a $15.6 billion company, but it generated $1.4 billion of operating cash flow in the past year. Its scale also comes with the benefit of a bigger marketing budget but less per-restaurant spend.
The way the pizza delivery and pickup business works is also compelling.
Pizza ingredients are relatively cheap, and Domino’s menu is relatively simple. This allows locations to operate with a minimal amount of staff and cost. Pizzas can also be prepared and cooked in a relatively small footprint. These advantages continue to attract franchisees, which run 99% of Domino’s locations. Meanwhile, the company enjoyed a 39% gross margin and 19% operating margin through the first three quarters of fiscal 2024. Those are enviable numbers in the restaurant business.
Analysts expect the pizza chain to continue growing at an industry-beating pace for the next several years.
Data source: StockAnalysis.com. Chart by author.
Underscoring all of this is the fact that Domino’s dividend has increased for 11 consecutive years now and is more than 15 times bigger than when it first initiated a quarterly payout.
The company’s track record is strong enough that Warren Buffett and Berkshire Hathaway added nearly 1.3 million shares (about $550 million) of Domino’s stock to their holdings last year.
The right pick … for a particular investor
Despite everything Domino’s has going for it, don’t lose perspective on what this stock can and can’t do. You can bet on it delivering steady, predictable growth, but you shouldn’t expect the kind of explosive — yet volatile — results that come from the market’s favorite tech stocks.
Not every holding in your portfolio needs to be a high-profile, high-flying growth stock, though. Slow and steady can also win the race long term.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, Domino’s Pizza, and Nvidia. The Motley Fool has a disclosure policy.
