Warren Buffett, the famous junk food lover, just invested in a national pizza chain that's trading near its lowest level of the year. Berkshire Hathaway bought more than 1.2 million shares of Domino's Pizza (DPZ.N) last quarter, worth about $550 million, according to a recent regulatory filing.
The investment is a very small portion of Berkshire's massive portfolio, with cash reserves alone exceeding $300 billion. So Buffett's investment lieutenants Ted Weschler and Todd Combs are likely behind the investment. Regardless of who initially had the idea, the Domino's Pizza investment fits in with the Omaha-based conglomerate's long-term investment strategy. Berkshire already owns 100% of See's Candies and Dairy Queen, and also counts Coca-Cola (KO.N) and Oscar Mayer hot dog owner Kraft Heinz (KHC.O) among its major stock investments.
The 94-year-old billionaire is known for his childlike eating habits, and he once proudly stated that he is willing to drink five cans of Coca-Cola and eat McDonald's every day. Despite his seemingly indulgent diet, Buffett still maintains good health. "I eat like a 6-year-old child," the Berkshire CEO once said. "If I take in 2,700 calories a day, a quarter of them come from Coca-Cola," Buffett once quipped humorously.
In 2014, Berkshire invested $3 billion in shares of Restaurant Brands International, the parent of Burger King and Tim Hortons, which also held a large stake in McDonald's (MCD.N) in the 1990s.
So far this year, Domino's Pizza's stock performance has lagged behind the S&P 500. This year, Domino's Pizza's stock price has returned about 10%, far behind the 25% return of the S&P 500. Berkshire's investments are in line with its value investing philosophy, focusing on cash flow, price to earnings (P/E), and price to book value (P/BV).
Meanwhile, Berkshire may have simply taken advantage of the sharp sell-off Domino's Pizza suffered in July, when its stock plunged 17%. In one day, the world's largest pizza chain's shares fell more than 13%, the biggest one-day drop since 2008, after the company informed investors that its sales would be lower than originally forecast and that it would open fewer new stores overseas than expected. Domino's Pizza's price-to-earnings ratio fell to 23.7, the lowest this year, according to FactSet data.
Although Berkshire's disclosure prompted a rise in Domino's Pizza's shares, the company still lags the performance of the S&P 500. "Short-term fundamentals remain under pressure," said Jeffrey Bernstein, an analyst at Barclays Capital. "Just like the 'burger wars' of the past, management believes we are now in the 'pizza wars' where all companies are looking at incremental value."
He also mentioned that Berkshire’s newly disclosed stake was brought up in meetings with Domino’s management, but the company didn’t add much. “We don’t think they spoke to Warren Buffett,” Bernstein told CNBC, referring to Domino’s management, but executives may have received questions from Berkshire before the stake was announced.
Article forwarded from: Jinshi Data