Is Dunkin’ Brands Too Expensive?

With shares of Dunkin’ Brands Group (NASDAQ:DNKN) trading at around $36.81, 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:

C = Catalyst for the Stock’s Movement

Dunkin CupTo immediately get to the question in the title, Dunkin’ Brands is currently trading at 39 times earnings. Starbucks (NASDAQ:SBUX) longs will be quick to point out that Starbucks is trading at 28 times earnings. However, does that mean that Starbucks is a better option? Sales for Dunkin’ Brands increased 4.77 percent in 2012. Sales for Starbucks increased 13.67 percent in 2012. Therefore, it would look as though Starbucks is showing stronger growth and a better valuation. We’ll offer a final opinion in the Conclusion section, but we will revisit the Dunkin’ Brands vs. Starbucks theme several times throughout this short article.

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Competition aside, Dunkin’ Brands opened 291 new stores in 2012, which is a bullish sign. Struggling companies don’t open 291 new stores; they close them. As we all know, this is a firmly established brand, which is one of the biggest long-term selling points. Once the brand is established, there is plenty of room for creativity to spur growth. That said, you need the available cash as well, and Dunkin’ Brands isn’t what you would call the most fiscally responsible company in the world. We’ll get to that on the next page.

Many coffee lovers are infatuated with Dunkin’ Brands coffee. This makes sense considering Dunkin’ Brands uses 100 percent Arabica coffee beans. Dunkin’ Brands, more specifically Dunkin’ Donuts, offers high-quality coffee at affordable prices. One of the biggest downsides for Dunkin’ Brands is that not all of its locations offer comfortable seating, or a comfortable atmosphere in general. These are more like get-it-and-go types of establishments. This is fine, but as long as Starbucks offers such a cushy atmosphere, it will present another avenue for Starbucks to steal market share.

Before we move on to some important numbers for Dunkin’ Brands, and before we form an opinion on the stock, let’s take a look at the 1984 commercial that cemented the brand name into our minds forever. If you have seen the commercial, then you might want to watch it for nostalgic purposes. If you haven’t seen the video, then you will now have an opportunity to see what the phrase “Time to make the donuts” is all about. Here’s the video:

Now let’s take a look at some important numbers prior to forming an opinion on the stock…