Mmmmm...Donuts, Coffee, Burgers!!!!!

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s a great time of year coming up for Dunkin' Donuts, owned by Dunkin’ Brands Group (NASDAQ: DNKN). Hot coffee and donuts, especially the maple donuts, are big sellers when it gets cold. (Say it with me, like Homer Simpson, “ Mmmmm…maple donuts.”) Not to mention the pumpkin drinks and donuts Dunkin' has been promoting. Pumpkin is just behind bacon in popular taste trends. (When will they make a maple, pumpkin, and bacon donut?) Dunkin' Brands is finally expanding west to Salt Lake City for 16 more restaurants in an agreement with Sizzling Donuts LLC. This after a February agreement with them for 17 new restaurants in Denver (cold, good for coffee and donuts) and El Paso TX (hot, good for iced coffee and Baskin-Robbins ice cream).

Dunkin' is also advertising for franchisees in Reno, Nevada and Northern Utah. With 10,083 restaurants worldwide and 2011 sales of $6.4 billion, the company is making Homer Simpsons globally even happier. The company serves 3 million customers a day. Its Baskin-Robbins ice cream division has 6000 outlets. Since many of the Baskin-Robbins are attached to Dunkin' Donuts in the same quick serve restaurants this gives potential franchisees lots of options, going to a single Dunkin' or a Baskin-Robbins or going for both. Dunkin’ Brands also works with franchisees with choices of real estate locations, whether as a freestanding unit or strip mall or mall related location.

Dunkin’ Brands is reporting on October 25. Will the earnings be good? Wells Fargo thinks so reiterating its Outperform on Monday. The current P/E, however is not “Boo!-tiful” like its Halloween ice cream cakes at 79.75 with a forward P/E of 21.02. Frightening, yes, beautiful, no. The yield is adequate at 1.90% with a 64.00% payout ratio. The stock is making the right moves westward, but is that enough to move the needle? Dunkin' Brands just debuted a little more than a year ago. It had a big move from $23.24 in December to a high of $37.02 in June, more than a 50% move. It has to compete with two formidable quick serve restaurants, Starbucks (NASDAQ: SBUX) and McDonald's (NYSE: MCD) on two different fronts, coffee and breakfast respectively. It also competes with privately held Dairy Queen on ice cream as well as your neighborhood ice cream trucks and your grocery store and little artisan ice cream shops and so on. Krispy Kreme Doughnuts (NYSE: KKD) is the most direct competitor in my book.

Starbucks is a business school example of growing too fast a few years ago when there were literally Starbucks locations across the street from one another. Now that CEO, Howard Schultz, has returned to man the store, expansions are more targeted. The opening of its first shop in tea-loving India with its centuries old traditions, is very ambitious, but possible to pull off as the concept of sitting drinking coffee and working on a laptop with free WiFi might be attractive to aspirational and ambitious computer savvy Indians. The P/E is 25.17 and the stock is some 25% off its 52 week high. It has a yield of 1.50%, which is less than Dunkin' Brands.  The company reports again on November 1. Starbucks has a low beta of .88 but it's like coffee that's been in the coffeepot too long. We want something fresh.. fresh like the donuts at Krispy Kreme.

Mmmm... Growth!

If you want a low P/E with some upside, Krispy Kreme might be the way to go with a 3.45 P/E and with a price target of $9.75 you have $2.00 or 25% upside. Long term it has 25% earnings growth and it's just gaining bullish traction since its Q2 earnings surprise in August. Same store sales have been rising for almost four years now and its profit margin is a delicious 38.71%. Its PEG ratio is also an attractive 0.7. It does not have the problem of basically running two different companies like Dunkin' has. Though it has less than one tenth the number of locations of Dunkin', it is expanding and plans to open 200 more locations in the next 5 years. That may not seem very exciting, but slow and steady is how Buffalo Wild Wings expanded and avoided taking on debt over the years. Krispy Kreme's beta is 1.00 and likely to avoid the huge volatility it was famous for when it was a momentum name. It reports on November 26.

Mmmmm... Yield!

Yield, are you lovin' it? Cravin it? Go to McDonald's with its 3.50% yield and 16.66 P/E. McDonald's serves 69 million customers a day, more than twenty times Dunkin's count. New CEO, Donald Thompson, has been catching heat, but he deserves a break today. Yes, they disappointed on earnings on October 19 by 4 cents but now might be the time to start a small position, especially on a bad market day. You could get a Big Mac size share from the dollar menu. Quarterly earnings growth is -3.50% almost the same as its 52 week performance down -3.58%. This is still a name that garners respect in the fast-food business. Its P/E is below the industry standard of 19.43 and below Yum! Brands and Burger King Worldwide. True, there's been little insider buying, but there are some institutions with large dollar stakes like the Bill and Melinda Gates Foundation at $874,012,425. FMR LLC and Vanguard are almost tied with over $4 billion worth of shares each.

I think McDonald's on a market downturn is a good value name with a yield better than most banks. Krispy Kreme is a comeback name that has a low P/E and bullish sentiment. The others I'm not so crazy about, but they're all off their highs.



leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Krispy Kreme Doughnuts, McDonald's, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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