Do Investors Run on Dunkin?

By Ryan Guenette - August 30, 2012 | Tickers: CBOU, DNKN, GMCR, PEET, SBUX | 0 Comments

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Dunkin Brands Group Incorporated (NASDAQ: DNKN) went public on July 27^th, 2011 at an offering price of $19.00 per share. As the opening bell rings nearly one year and one month later, Dunkin trades around the $28.00 area. This represents an increase of 47.37% since the company went public. Reaching as high as $37.02, and as low as $23.24, this franchisor of restaurants serving coffee and a wide array of baked goods, as well as ice cream has attracted a lot of attention from Wall Street because of the strong start the company is off to. Known for its Dunkin Donuts and Baskin-Robbins brands, Dunkin is now valued at a whopping $3.42 billion. So do investors run on Dunkin? 

Caffeinated Fundamentals

In 2011, Dunkin Brands reported earnings per share of $0.32. In 2013, the average analyst consensus believes the company will derive $1.35 from its business operations. This represents an increase of 321.88% over two short years, an astonishing feat for Dunkin. Based on these statistics, the company’s compound annual growth rate (CAGR) is 105.40%, and while this rate is undeniably unsustainable, it is encouraging to see such a growth spurt. However, it is nerve-wracking to not have access to financial records stretching back further in time, due to the recent offering of shares. In addition, Dunkin Brands currently pays out an annual dividend of $0.60, which at the current price, puts the company’s dividend as yielding 2.13%. By 2014, the street anticipates Dunkin’s dividend to reach $0.71, which at the current price would Dunkin’s dividend as yielding 2.48%. From this we can see the underlying financial resolve of the company, incredible growth spurt, and decent dividend.

The chart below displays Dunkin Brand’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the foreseeable future.

Into the Future

The S&P 500 price to earnings ratio is 16.21. At the moment Dunkin Brands has a price to earnings ratio of 53.81. This indicator signals a company that is vastly overpriced. Dunkin possesses incredible short terms growth, which has led to a huge overhyping in the company. Based on 2013’s projected earnings, the stock’s price to earnings ratio will be 20.89, a much more reasonable number, yet this only is true if the stock remains motionless for two years, which is highly unlikely. In conclusion, at the moment the stock may appear vastly overpriced, but its explosive growth prospects somewhat justify the high multiples.

While the entire eastern seaboard is covered with Dunkin Donuts, the farthest outreach the company has with its core business is to the Great Lakes. As the chart below displays, the potential for further expansion in the United States is immense.

On the international side, Baskin-Robbins possesses a large presence, but significant expansion is still possible, especially for Dunkin Donuts. The chart below displays the international presence of Dunkin’s two brands.

The bottom line is that Dunkin Brands is just beginning its expansion plans, and should significantly benefit from potential lying before it.

Who Serves the Best Cup of Coffee?

Compared to some of Dunkin Brand’s most prominent competitors, such as: Starbucks Corporation (NASDAQ: SBUX), Green Mountain Coffee Roasters Incorporated (NASDAQ: GMCR), Peet’s Coffee & Tea Incorporated (NASDAQ: PEET), and Caribou Coffee Company Incorporated (NASDAQ: CBOU), Dunkin compares relatively favorably.

In terms of growth, Green Mountain peaks over the competition, while Peet’s is the industry laggard. Dunkin and Starbuck’s are the only companies to pay dividend in the industry, with Dunkin possessing the largest dividend, and Starbucks possessing the fastest growing dividend. In the fundamental ratio comparison, Peet’s trades at a hefty premium, while Green Mountains trades at an impossible bargain. The same is true when growth is taken into account. In the net profit margin comparison, Caribou stands out to the upside, while Peet’s stands out to the downside.

The Foolish Bottom Line

Every morning millions of loyal customers wake up to a steaming cup of Dunkin Donuts coffee. Their brand is engrained in the threads that make up the cultural blanket of the northeast. Dunkin possesses underlying financial strength, is set to explode in growth, and pays out the largest dividend in its industry. The company still has a huge amount of room to grow, and should benefit from its development into the entire United States.  Baskin-Robbins is a more international play, but both have international growth prospects. The foolish bottom line is that Dunkin is overpriced at the moment, but as it approaches closer to the $20.00 area, it is a screaming buy.

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