Can Your Portfolio Run on Dunkin’?

Almost two full years after its IPO, Dunkin’ Brands’ (NASDAQ:DNKN) share price continues to climb. Investors have been hungry for Dunkin’ Brands shares because of its high growth prospects. Dunkin’ Brands has been a small cap darling over the past year, but can it make good on its growth promises? Let’s use our CHEAT SHEET investing framework to decide whether Dunkin’ Brands is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Growth 

Dunkin’ Brands announced another strong quarter back in April. Revenues rose 6.2 percent from the previous year’s quarter, while earnings increased 5 percent and same-store sales improved slightly. Dunkin’ has benefitted from higher growth in the quick-service restaurant industry—expected to grow 4.9 percent in 2013 according to the National Restaurant Association. Additionally, higher ticket prices due to a more diversified menu offered increased revenues, as did the increase in the total number of restaurants, which surpassed 17,500 this quarter.

Dunkin’ is mostly concentrated in the Northeast, but has had its eyes on the West since it went public. There’s just one Dunkin’ store per one million people out West—an area which the company hopes to open around 700 stores by the end of 2013. The company has also become active in the consumer packaged goods space by introducing its K-Cups to major grocery stores. Baskin-Robbins, which represents a quarter of Dunkin’ Brands’ revenues has struggled domestically, but thrived internationally; however, the ice cream industry is very volatile and Baskin-Robbins certainly presents some variability to overall business operations moving forward. Dunkin’ Brands already has a significant presence overseas, but future growth is uncertain as big players like McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX) continue to grow their international operations.

T = Technicals on the Stock Chart are Strong

Dunkin’ Brands is currently trading at $40.50, above both its 200-day moving average of $38.53 and its 50-day moving average of $42.13. The company has experienced a strong uptrend in the past year—up almost 30 percent in the past 12 months. The company hit a new 52-week high of $45.00 earlier this week.

E = Excellent Performance Relative to Peers?

Dunkin’ Brands is trading at a higher trailing price to equity ratio than both Starbucks and the restaurant industry average, suggesting that Dunkin’s earnings are relatively more expensive to own. Generally, a higher price to equity ratio can be justified if a company has high growth prospects. Dunkin’ certainly has solid growth potential with its development in the west coast marketplace and overseas, but analysts’ estimate Starbucks growth rate to be higher, even though it trades at a lower price to equity ratio.

A huge red flag for Dunkin’ Brands is its debt to equity ratio, hovering at around 5.32. Its debt level significantly exceeds that of its chief competitor and the restaurant industry average. Dunkin’ Brands originally went public to raise money to pay its debt down; instead, it has actually increased its debt in the last two years. Why pay more for a stock with a slower growth rate and more debt? Jump to the conclusion to find out.

DNKN SBUX Industry
Trailing P/E 47.17 35.43 21.7
Growth Est. (5 yr.) 15.60% 18.93% N/A
Debt to Equity 5.32 .1032 .68
ROIC 2.49% 25.89% N/A

 

onclusion

While Dunkin’ Brands and Starbucks are certainly fierce competitors in the quick-service food industry, investors shouldn’t feel the need to pick just one of the two. Fundamentally, the two companies cater to different groups—Starbucks is more of an upscale coffee shop, while Dunkin’ Brands’ products offer more value at lower prices. Additionally, the two have completely different business models; Dunkin’ is almost 100 percent franchised, while Starbucks is centrally managed. Dunkin’ is arguably a safer bet for those bearish about the future health of the global economy; certainly, coffee drinkers practicing frugality in the face of another economic downturn would choose Dunkin’ for its lower prices. Dunkin’ Brands, however, has a mountain of debt on its balance sheet that could cause problems down the road. While its growth prospects are promising, Dunkin’ seems overpriced based on its high price to equity ratio and the high debt level on its books. Dunkin’ Brands is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.