When Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) makes portfolio expansion, Wall Street notes. Recently, Warren Buffett and his investment team bought a large position in it Domino’s Pizza(NYSE: DPZ). If you’re thinking about Domino, though, you might want to take a look Cava(NYSE: CAVA) instead. Here’s why.
When analyzing the acquisition of Berkshire Hathaway, it is important to understand the investment strategy that Warren Buffett has adopted over the long term.
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Not too deep into things, he prefers to buy well-run companies when they are selling at what he sees as attractive prices. Then he steps back and lets management do its job, helped by the long-term growth of the business. Given Berkshire Hathaway’s success over time, it’s hard to argue with trends.
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However, it’s also important to consider the potential limitations of the process when looking at extended companies. In this case, the Domino’s Pizza restaurant is the new stock. One of the interesting things is that the pizza maker has 21,000 locations worldwide, and most of the company’s stores are outside the United States. Simply put, Domino’s Pizza is a great food concept.
That doesn’t mean Domino’s can’t grow its store. But new locations aren’t going to be the biggest driver of performance. Improving same-store sales is likely to be the biggest driver of financial results. That’s not a bad thing, but it means that the second biggest long-term growth, the opening of shops, is not getting used to the small level of food, like Cava.
Cava is a Mediterranean-themed fast-casual food concept that uses a similar method of food preparation Chipotle Mexican Grill. Currently, Cava operates approximately 350 locations, less than Domino’s Pizza.
But here’s the interesting thing: Cava opened 62 stores in the 12 months leading up to the third quarter, which helped push its year-over-year store count up 21%. By comparison, Domino’s Pizza opened 805 new locations last year, resulting in a 4% store increase. Clearly, new store openings are a very strong growth tool for Cava, increasing its appeal to growth investors.
Then there’s same-store sales growth, which is going to power Domino’s Pizza. In the third quarter of 2024, Domino’s store sales growth was a strong 3% in the United States and a slow-moving 0.8% worldwide. That’s respectable, but it’s wrong.
Cava’s same-store sales growth in the third quarter was 18.1%. That’s amazing and, frankly, impossible. However, management is targeting 12% or so for the fourth quarter, which is still significantly higher than what Domino’s Pizza is likely to achieve. It is the second lever of growth at Cava.
To be fair, there is an important difference that investors should consider for forward valuation. Domino’s Pizza’s price-to-earnings ratio is around 29 times right now. Cava’s P/E ratio is about 350 times. Clearly, investors have baked in the expectation of significant growth at Cava.
No matter, Advisor-Shares Restaurant ETFThe managed ETF is focused primarily on the restaurant sector, with 22 restaurants and a P/E ratio of just under 20. So Domino’s Pizza is not very expensive.
Buying Cava Group brings a lot of risk with it. It is a small company that is growing fast, something that can lead to great success or management can make mistakes and things can go bad because of the high expectations built into the stock price. Domino’s Pizza cannot offer the same high potential or the same low risk.
But if you’re looking for growth, Cava Group’s small size and clearly popular food concept will probably pass on that front. And that could make it a better choice than Domino’s Pizza for some investors, even though Warren Buffett actually chose the pizza maker over Cava.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Chipotle Mexican Grill, and Domino’s Pizza. The Motley Fool recommends Cava Group and recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Should You Buy This Million-Maker Stock Instead of Domino’s Pizza? first published by The Motley Fool
