Why Domino's Pizza (DPZ) is a Top Growth Stock for the Long-Term

Warren Buffett recently made news about the stocks that Berkshire Hathaway Inc. (NYSE: BRK.B) sold. But it looks like Buffett isn’t sitting this rally out completely. On November 15, Buffett made two significant purchases in two stocks that the company had not previously owned. The stocks were Domino’s Pizza Inc. and Pool Corp. .

The holdings make up just a tiny fraction of the Berkshire portfolio, but much like when Buffett started buying homebuilder stocks in 2023, the moves have investors wondering what Buffett may see in a company like Pool Corporation.

According to its website, Pool Corporation, doing business as POOLCORP, is “the world’s leading wholesale distributor of swimming pool equipment, parts and supplies, and related outdoor living products.” The company’s business is divided into discretionary and non-discretionary segments. It works with designers and builders to equip new pool construction, which is a discretionary purchase. It also provides maintenance equipment for pool owners, which is non-discretionary.

Is Buffett Buying the Sales Dip?

On November 19, housing starts fell 6.9%, weaker than expected. This was partly due to the two hurricanes that ripped through the Southeast United States, particularly Florida, a key market for Pool Corp.

On the other hand, housing permits increased by just 0.5%, suggesting that the weak housing start number is likely being fueled by mortgage rates that are likely to stay higher for longer.

POOLCORP is part of the consumer discretionary stocks sector but is a housing-adjacent play for investors. Looking at the POOL stock chart, investors see a sharp move higher in 2020 and 2021. This aligned with homeowners stepping up their home improvement efforts during a global pandemic and the “great relocation,” which dispersed new homeowners into three of the company’s key markets: Florida, Texas, and Arizona.

An active hurricane season in Florida impacted POOLCORP’s quarterly sales, but that could be exactly what Buffett sees as an opportunity in the stock.

Earnings Came in as Expected

POOLCORP delivered a solid but as-expected third-quarter earnings report in October. Earnings per share (EPS) of $3.26 beat analysts' expectations for EPS of $3.15. Revenue of $1.43 billion was also ahead of expectations for $1.40 billion.

The double beat came with some caveats. First, net sales were down 3% year-over-year. The company cited the storms and subsequent cleanup in Florida as a key reason. There are times when weather can be overused to justify weak results. That's not the case with Pool.

And it’s important to note that, despite the storms, the company did see a slight 1% sales growth in Florida. It was also flat in Arizona, but sales related to pools, independent of landscaping and irrigation were positive in the state. However, the sales declines in California (-3%) and Texas (-6%) are further reminders that homeowners are still hesitant with their discretionary spending.

The company isn’t forecasting much improvement in sales for the current quarter. Nevertheless, if you believe this earnings report could reflect the worst-case scenario, POOL stock is starting to look attractive.

Checking Off Buffett’s List

Diving into POOLCORP’s balance sheet, you can see a few reasons why the company may have piqued Buffett’s interest.

• Inventory of $1.2 billion at the end of the quarter was down 6% year-over-year.
• The company reduced debt to $924 million, $110 million of debt retired in the last 12 months.
• Cash flow from operating activities came in at $489 million in 2024, with operating cash flows of 123% of net income.
• The company has conducted $159 million in total share buybacks in 2024 and still has $507 million left on its share repurchase authorization.
• It is on track to increase its dividend for the 15th consecutive year; the dividend has been growing at an average annual rate of over 23% in the last three years.

Should You Take the Plunge Into POOL Stock?

POOL stock has been trading in a confirmed range since bouncing off its 52-week low in July. And even though the stock didn’t hold the Buffett bounce, it’s attempting to gather support at a level above $350.

That’s right about where analysts have the consensus price for POOL stock. However, since the earnings report, several analysts have raised their price targets. The most significant comes from The Goldman Sachs Group Inc. , which has a new price target of $415.

It’s clear from his purchase of POOL stock that Buffett’s thinking aligns with that of Goldman Sachs. However, at first glance, this doesn’t appear to fit as a traditional Buffett buy-and-hold stock. But if you agree that the company’s sales may exceed expectations, this could be a savvy short-term trade.

CAVA Group, Inc. CAVA reported robust third-quarter 2024 results on Nov. 13. Its growing dominance in the Mediterranean dining space aided the third-quarter performance.

The company has positioned itself as a leader in this emerging cuisine category, leveraging its unique value proposition to resonate with a broad audience. This momentum reflects CAVA's ability to redefine cultural dining trends and establish Mediterranean cuisine as a major player in the restaurant industry.

Major Takeaways From Q3 Earnings

Earnings & Revenues Beat Estimates: The company reported third-quarter 2024 earnings per share of 15 cents, beating the Zacks Consensus Estimate of 11 cents. In the prior-year quarter, it had reported adjusted earnings of 6 cents. CAVA’s revenues were $243.8 million, surpassing the consensus estimate of $235 million and increasing 38.9% year over year.

Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.

Traffic & Comps Rise in Q3: The company’s results were aided by robust year-over-year traffic and same-restaurant sales growth. In third-quarter 2024, same-restaurant sales increased 18.1%, including guest traffic growth of 12.9%, and a 5.2% jump in menu prices and product mix.

Unit Expansion Solid: CAVA added 11 net new restaurants in the quarter, bringing the total to 352, marking a 21.4% year-over-year increase. The company continues to see strong performance from its new restaurant class, boosting confidence in its scalability.

Guidance for 2024 Raised: Following the robust third-quarter 2024 results, the company raised its guidance for the year. It expects 56-58 net new restaurant openings, up from the prior mentioned 54-57. The company anticipates CAVA same-restaurant sales growth of 12-13%, up from the earlier stated 8.5-9.5%. The restaurant-level profit margin is expected between 24.5% and 25.0% compared with the previously mentioned 24.2-24.7%.

Other Factors Aiding CAVA

The company has been benefiting from menu innovation. The introduction of the latest offerings like Garlic Ranch pita chips and the national rollout of steak has been well-received, driving incremental sales and brand engagement.

Garlic Ranch pita chips have become a social media sensation, amassing more than 12 million impressions across various platforms and generating an additional 347 million earned media impressions. Additionally, the nationwide launch of its steak offering more than four months ago continues to demonstrate strong engagement. These initiatives have significantly bolstered brand awareness, which has increased 8 percentage points since the IPO and continues growing with each product launch.

CAVA is leveraging AI-driven kitchen technologies to improve ingredient management, order accuracy and operational efficiency. Early tests in select locations show promising results. The newly launched loyalty rewards program has boosted customer engagement, with loyalty sales as a percentage of revenues growing 200 basis points.

The company announced plans to expand into new markets, such as South Florida and additional Midwest locations, with its 2025 pipeline reflecting at least 17% unit growth. The brand continues to capitalize on the rising popularity of Mediterranean cuisine, emphasizing its unique value proposition of health, bold flavors and genuine hospitality.

CAVA’s Price Performance & Valuation

The CAVA stock has surged 80.6% over the past six months, significantly outperforming its industry peers and the broader market. The industry has rallied 8% and the S&P 500 rose 10.5%. CAVA's strong momentum shows its continued ability to fire on all cylinders.

CAVA has outpaced industry players like Chipotle Mexican Grill, Inc.’s CMG 7.4% dip, Domino's Pizza, Inc.’s DPZ 14.4% decline and Restaurant Brands International Inc.’s QSR 0.7% gain in the past six months.

Stock Price Performance

CAVA is currently valued at a premium compared with its industry on a forward 12-month P/S basis. The company’s forward 12-month price-to-sales ratio stands at 13.81, significantly higher than the industry’s 3.98 and the S&P 500's 5.17.

P/S (F12M)

Estimate Revision Favoring the Stock

Reflecting the positive sentiment around CAVA, the Zacks Consensus Estimate for earnings per share has seen upward revisions. In the past 7 days, analysts have increased their estimates for the current and next fiscal years by 11.1% to 50 cents and 13% to 61 cents, indicating year-over-year growth rates of 138.1% and 22.9%, respectively.

Conclusion

CAVA's impressive third-quarter 2024 performance highlights its strong positioning in the growing Mediterranean dining space. The company's ability to innovate with menu offerings, expand into new markets and leverage technology for operational efficiency underscores its growth potential. With a scalable model and increasing popularity for its cuisine, the Zacks Rank #2 (Buy) company is well-positioned for sustained momentum, making it an attractive investment opportunity for those seeking exposure to a dynamic and expanding segment of the restaurant industry.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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