This Restaurateur is Well Poised For Growth

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

The US unemployment rate has plunged to near four year lows, and consumer spending is on the rise. Yes, most people are following austerity drives in the households, but all that is soon going to change as more people have added disposable income to spend. It is due to this reason that restaurateurs appear as good investment options, and here are a few reasons why I’m bullish on Dunkin' Brands (NASDAQ: DNKN).

Dunkin' Brands is a quick service restaurant franchisor, which offers coffee, ice cream, and baked products to its customers. The company was incorporated in 2005, and since then it has grown to become a $3.2 billion enterprise by market capitalization. Dunkin' Brands has nearly 17,000 distribution points and is geographically well spread, with its presence in 58 countries.

To cut down on costs, the company recently shut down its ice cream manufacturing facility in Canada, and chose to outsource ice cream manufacturing. Dunkin' Brands has entered an agreement with Dean Foods, and the latter manufactures and supplies ice cream to the Baskin Robbins stores located in the US.

In the recent earnings release, the company reported EPS of $0.37, beating the estimates of $0.35 and was up 42% from last year's quarter. The company’s quarterly net income rose to $29.5 million and revenues rose from $163.5 million, to $171.7 million, an increase of 5%. Management raised its guidance and expects the EPS to be $1.25-$1.27 against the previous projected $1.22-$1.25.

It was also announced that in the current quarter, Dunkin' Brands was able to add 78 new restaurants, which brings the total to 142 new restaurants launched YTD. Management raised its guidance and now expects to open 280-300 new restaurants by the end of the current year.

Dunkin' Brands also launched a smartphone application that allows customers to pay their bills and order gifts. Management expects the entry in the mobile commerce solutions to be a big growth driver for Dunkin' Brands, as the mobile app would also have enticing discounts and offers for the users. Besides offering lucrative deals, the mobile app is expected to add flexibility to the payment process.

The company recently entered an agreement with Coca Cola, under which Dunkin' Brands would serve Coke’s offerings at its restaurants. Such a move would add to the diversity of products being served at Dunkin' restaurants, and more customers are expected to show up at the QSR chain. The management expects an uptick in the revenues of both the companies.

Dunkin' Brands shares its market space with Starbucks (NASDAQ: SBUX), and McDonald’s (NYSE: MCD)

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Gross Profit Margin</p> </td> <td> <p>EPS growth expected next yr.</p> </td> <td> <p>ROE</p> </td> </tr> <tr> <td> <p>Dunkin' Brands</p> </td> <td> <p>79.38%</p> </td> <td> <p>18.25%</p> </td> <td> <p>16.23%</p> </td> </tr> <tr> <td> <p>Starbucks</p> </td> <td> <p>26.40%</p> </td> <td> <p>19.66%</p> </td> <td> <p>28.46%</p> </td> </tr> <tr> <td> <p>McDonalds</p> </td> <td> <p>39.37%</p> </td> <td> <p>9.21%</p> </td> <td> <p>-NA-</p> </td> </tr> </tbody> </table>

Source: Finviz

The financial metrics reveal that Dunkin' Brands enjoys the highest gross profit margin. The ROE stands at 16.23%, and analysts expect the EPS growth to be around 18% over the next year.

To wrap it up, the company reported stellar financial performance and is rapidly increasing its store count. With tactical moves like outsourcing coffee, an agreement with Coca Cola, and entry into the mobile commerce segment, Dunkin' Brands looks well poised for growth. The company has a good mix of fundamentals, and it is due to these reasons that Dunkin' Brands has a Foolish Buy rating.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters, short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters, and short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, 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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