Can Dunkin’ Brands See a Turnaround?

With shares of Dunkin’ Brands (NASDAQ:DNKN) trading around $708, is PCLN 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.

Dunkin’ Brands today reported results for the second quarter ended June 28, 2014. “Second quarter sales growth was below our expectations with Dunkin’ Donuts U.S. comparable store sales not accelerating as fast or to the degree that we anticipated after a difficult first quarter. We believe this was largely the result of macroeconomic challenges facing consumers, as evidenced across the retail and the QSR industries, along with an unseasonably cold, rainy start to the spring season,” said Nigel Travis, Chairman & CEO, Dunkin’ Brands Group, Inc. “Dunkin’ Donuts U.S. transaction growth was encouraging and comparable store sales gradually improved throughout the quarter with June average weekly sales reaching the highest volume on record. We remain confident in our ability to drive long-term growth through our product and marketing innovation, including our mobile and loyalty programs. In fact, we’re excited to announce that we recently eclipsed 7.9 million downloads of the Dunkin’ Donuts mobile app, and we are nearing 1.3 million DD Perks Rewards members.”

“In addition to the impact of Dunkin’ Donuts U.S. comparable store sales, our full-year earnings per share target is also being affected by weak performance by our Baskin-Robbins joint venture in Japan along with lower-than-anticipated profit from the sale of ice cream in the Baskin-Robbins International business,” said Paul Carbone, CFO, Dunkin’ Brands Group, Inc. “While we are updating certain 2014 targets, we are maintaining our long-term growth targets.”

T = Technicals on the Stock Chart are Weak

Dunkin’ Brands stock has been pulling back over the last couple of months. The stock is currently trading near lows for the year and may need time to stabilize. 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

24.37%

53%

50%

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

Put IV Skew

Call IV Skew

August Options

Steep

Average

September 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 significant 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 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

14.63%

13.79%

22.56%

42.31%

Revenue Growth (Y-O-Y)

4.60%

6.18%

13.28%

8.50%

Earnings Reaction

-4.42%*

-1.89%

3.36%

-0.60%

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.

* As of this writing

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

-8.80%

0.96%

-1.73%

-1.18%

-1.68%

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 stock has been pulling back over the last couple of months and is currently trading near lows for the year. 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 poor year-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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