Tobias Carlisle is the founder of the investment firm Acquirers Funds, and author of The Acquirer’s Multiple and Deep Value.
In the recent Q2, 2022 Mastermind episode of We Study Billionaires Tobias pitched Dominos Pizza (NYSE:DPZ) as a buy.
Let’s look at why he likes the stock and how it stacks up against Buffett’s 4 principles.
- Do he understand it?
- Does it have favorable long term prospects?
- Is it operated by honest and competent management?
- Is it available at an attractive price?
He understands it
He uses the product.
“Personally, my family eats Domino’s about once a week.”
They leverage technology
“One of the things that really stands out is how easy it is to use their digital app. It remembers who you are and knows what you like. It’s a handful of button pushes. Then, when you push that button, it creates this flurry of activity in the store.”
It’s the cheapest way to feed a family.
“What’s most interesting about Domino’s, it’s the cheapest way to feed a family of four. If you look through all of the other options that people have, Domino’s is the cheapest way to do it.”
“It’s one of the ways that people will continue to feed their families. I don’t think that there’s any risk that, there’s no risk to the business model.”
“Domino’s is very, very consistent, and it’s incredibly cheap.”
He thinks it has favorable long term prospects
It has a high return on invested capital
“The reason I like it so much, it’s got this huge return on invested capital, because it’s a franchise model.”
“They have an incredibly high and consistent return on invested capital. Even at where it is at 55%, it earns more on its assets than Google does.”
They have mastered delivery
“Domino’s was one of the very first delivery companies. They solved that delivery issue that has plagued all of these other firms, Doordash and so on, Uber Deliveries. None of them have been able to figure out how to do it profitably, but Domino’s has been doing it profitably for a very long time.”
It’s still growing
“In 2017, they had about 9,000 international storefronts. Now they’ve got about 12,000, which is about 30% total growth over about five years.”
“I think that it’ll probably grow, could be eight to 10% in the future.”
The problems
“I think there are a few reasons why it’s trading cheaply now.”
The pandemic accelerated growth
“One of them is that it was one of those pandemic stocks where, when people were unable to get out as much, Domino’s became a very popular way of ordering, because they had that touchless delivery. It kind of got ahead of itself through the pandemic, and it’s come back a little bit as a result, just being too popular.”
Driver shortages
“They’ve also got this ongoing driver shortage. One of the problems with all of these competing delivery companies is that there’s just lots of competition for drivers. It’s just hard to find employees at this time in the cycle, for whatever reason. It’s very low unemployment, people have got their choice of jobs.”
Wheat shortages
“The other problem for Domino’s has been that pizza is a … they’re made out of dough. There’s lots of wheat. With the Russian invasion, we get a lot of our wheat globally. A lot of wheat comes out of Russia. That has pushed up the price of the commodity, wheat and other commodities that go into pizza. It’s made them a little bit more expensive for Domino’s to produce than they would’ve otherwise been.”
He believes it is operated by honest and competent people
They use free cash flow well
“They’ve been very consistent repurchasers of stock. They’ve taken a lot of that free cash flow. They pay a little dividend, repurchase some stock. Total shareholder yield, I think is something in the order of 6%.”
The franchises are well run
“I think the most interesting statistic is that 95% of Domino’s stores come from people who are formerly drivers for Domino’s, or formally employees for Domino’s. They get inside, and I think that they see that it works. I think that’s really encouraging. That’s a good statistic. It’s not outside capital, it’s people who get inside the business really like the way the business operates.”
He thinks it is available at an attractive price
“Where it’s trading now, market cap’s about $12.7 billion, and got about $5 billion in debt total to enterprise value.”
“Doing about $18 billion in sales. You’re buying it for one-time sales here, and your free cash flow yield’s around 3.2%.“
“I think it’s worth about $500”
Do you agree with Tobias?
What are your thoughts on Dominos Pizza?
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