When Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) makes a portfolio addition, Wall Street takes notice. Recently, Warren Buffett and his investment team bought a sizable position in Domino's Pizza (NYSE: DPZ). If you are considering Domino's, however, you might want to look at Cava (NYSE: CAVA) instead. Here's why.
What does Warren Buffett do?
When analyzing Berkshire Hathaway acquisitions, it is important to understand the investment approach that Warren Buffett has long taken.
Without getting too deep into things, he prefers to buy well-run companies when they are trading at what he perceives to be attractive prices. Then he steps back and lets management do its job, benefiting from the long-term growth of the business. Given Berkshire Hathaway's success over time, it is hard to argue with the approach.
Image source: Getty Images.
However, it is also worth considering the potential limitations of the approach when you look at the companies that have been added. In this case, restaurant Domino's Pizza is the new stock. One of the interesting factors is that the pizza maker has 21,000 locations around the world, with most of the company's shops actually located outside of the United States. Simply put, Domino's Pizza is a fairly mature food concept.
That doesn't mean Domino's can't grow its store count. But new locations aren't going to be the main driver of performance. Improving same-store sales is likely going to be a much larger driver of financial results. That's not a bad thing, but it basically means that the second big lever for long-term growth, store openings, isn't getting used to the degree that it would at a smaller food concept, like Cava.
What does Cava do?
Cava is a Mediterranean-themed fast-casual food concept that uses a similar food preparation approach to Chipotle Mexican Grill. Right now, Cava operates about 350 locations, much fewer 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 a massive 21%. By comparison, Domino's Pizza opened 805 new locations over the past year, leading to a store count increase of just 4%. Clearly, new store openings are a far more powerful growth tool for Cava, adding to its appeal for growth-oriented investors.
Then there's same-store sales growth, which is what is going to power Domino's Pizza. In the third quarter of 2024, Domino's same-store sales growth was a solid 3% in the United States and a less-than-inspiring 0.8% internationally. That's respectable, but not great.
Cava's same-store sales growth in the third quarter was 18.1%. That's amazing and, frankly, not sustainable. However, management is targeting 12% or so for the fourth quarter, still much higher than what Domino's Pizza is likely to achieve. That's a second lever for growth at Cava.
To be fair, there's an important difference that investors need to consider on the valuation front. Domino's Pizza's price-to-earnings ratio is around 29 times right now. Cava's P/E ratio is nearly 350 times. Clearly, investors have baked in sizable growth expectations at Cava.
However, Advisor-Shares Restaurant ETF, an actively managed ETF that is focused on the restaurant sector, owns 22 restaurants and has a P/E ratio that's just under 20. So Domino's Pizza isn't exactly cheap, either.
How aggressive are you?
Buying Cava Group brings a lot more risk with it. It is a small company that is growing rapidly, something that can lead to huge success or management could misstep and things could get ugly thanks to the high expectations built into the stock price. Domino's Pizza isn't likely to offer the same upside potential or the same downside risk.
But if you are looking for growth, Cava Group's small size and clearly popular food concept is likely to outperform on that front. And that may make it a better option than Domino's Pizza for some investors, even though Warren Buffett has clearly chosen 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
