Does Dunkin’ Brands Have a Bright Future?

With shares of Dunkin’ Brands (NASDAQ:DNKN) trading around $45, is DNKN an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Dunkin’ Brands owns, operates, and franchises quick service restaurants under the Dunkin’ Donuts and Baskin-Robbins brands worldwide. The company operates in four segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins International, and Baskin-Robbins U.S. Its restaurants offer coffee, donuts, bagels, ice cream, frozen beverages, baked goods, and related products. The increasing popularity of the product offerings by Dunkin’ Brands is fueling excellent growth for the company.

If you’re grabbing a sandwich at Dunkin’ Donuts, the chain wants you to consider it a snack, not a full lunch.  The chain has been expanding its sandwich offerings to bring in more business during the afternoon. But Dunkin’ Brands CEO Nigel Travis said those sandwiches — which include fried chicken and grilled cheese varieties — shouldn’t be considered lunch. “We’re not moving into lunch. We’re in snacking. We never talk about lunch,” Travis said in an interview. Travis said Dunkin’ is focused on two growth areas — breakfast and snacking. The strategy is a reflection of how people are increasingly eating several smaller meals a day, rather than sticking to just breakfast, lunch and dinner.

Dunkin’, which is based in Canton, Massachusetts, isn’t the only company going after the snacking business. It’s a strategy being used by numerous fast-food chains to get people in the door between meals and help boost overall sales. Taco Bell, for example, has been featuring smaller bites positioned as snacks to attract customers during the late afternoon. McDonald’s (NYSE:MCD) snack wraps and fruit smoothies are designed to draw people throughout the day. For its part, Dunkin has historically done most of its business before 11 a.m. To attract more customers after that morning crush, it rolled out a lineup of deli-like sandwiches in 2012. The offerings are relatively compact so they can be easily eaten on the go, but most have north of 400 calories.

T = Technicals on the Stock Chart Are Mixed

Dunkin’ Brands stock has struggled to make significant progress in recent times. The stock is currently pulling back and may need time to stabilize before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Dunkin’ Brands is trading below its rising key averages which signal neutral to bearish price action in the near-term.

DNKN

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Dunkin’ Brands options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Dunkin’ Brands options

20.42%

10%

8%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Dunkin’ Brands stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Dunkin’ Brands look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

13.79%

22.56%

42.31%

24.24%

Revenue Growth (Y-O-Y)

6.18%

13.28%

8.50%

5.86%

Earnings Reaction

-1.89%

3.36%

-0.60%

-1.73%

Dunkin’ Brands has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Dunkin’ Brands recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Dunkin’ Brands stock done relative to its peers, Starbucks (NASDAQ:SBUX), McDonald’s (NYSE:MCD), Yum Brands (NYSE:YUM), and sector?

Dunkin’ Brands

Starbucks

McDonald’s

Yum Brands

Sector

Year-to-Date Return

-5.64%

-5.05%

3.99%

4.67%

-1.50%

Dunkin’ Brands has been a poor relative performer, year-to-date.

Conclusion

Dunkin’ Brands provides delicious items that fulfill the sweet cravings of many consumers. The company has been expanding its sandwich offerings to bring in more business during the afternoon. The stock has struggled to make significant progress and is currently pulling back. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased. Relative to its peers and sector, Dunkin’ Brands has been a pooryear-to-date performer. WAIT AND SEE what Dunkin’ Brands does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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