Is Dunkin’ In Danger?

With shares of Dunkin’ Brands Group (NYSE:DNKN) trading at around $39.13, 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

Is it the slight roast flavor that hooks coffee drinkers? Maybe it’s the affordability of the coffee in comparison to Starbucks Corporation (NASDAQ:SBUX). The drive-thru convenience is another possibility. Maybe it’s even the donuts! Donuts go well with coffee. Whatever the case may be, Dunkin Brands has seen solid growth over the past several years. It’s also looking to expand in West Virginia, Ohio, Utah, and eventually northern California. Considering more than one third of the United States population drinks coffee every day, it seems as though it would be a good idea. Another positive for Dunkin’ Brands is that Caribou Coffee just announced it will be closing 15 percent of its locations throughout the United States. This will increase market share for Dunkin’ Brands and Starbucks.

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At the present time, Dunkin’ Brands has strong margins. In fact, its profit margin is more impressive than the profit margin at Starbucks (see chart below). Dunkin’ Brands also offers a higher yield of 2 percent (opposed to 1.50 percent for Starbucks). Dunkin’ Brands will be following the lead of Starbucks by adding items to its menu. These items will include chicken and tuna wraps. It looks as though Dunkin’ Brands is attempting to outdo Starbucks in as many areas as possible. However, there are some major differences between these two companies, and both of them favor Starbucks.

The first major difference is that revenue growth has slowed for Dunkin’ Brands whereas this hasn’t been the case for Starbucks. The second major difference is that Dunkin’ Brands has a debt problem whereas Starbucks has a very strong balance sheet. We’ll expand on this soon.

For now, let’s get to some numbers. The chart below compares fundamentals for Dunkin’ Brands, Starbucks, and Krispy Kreme Doughnuts (NYSE:KKD). Dunkin’ Brands has a market cap of $4.19 billion, Starbucks has a market cap of $43.39 billion, and Krispy Kreme has a market cap of $995.59 million.

DNKN

SBUX

KKD

Trailing   P/E

42.45

31.16

49.63

Forward   P/E

22.01

22.11

21.90

Profit   Margin

16.46%

10.50%

4.77%

ROE

19.64%

28.84%

8.39%

Operating   Cash Flow

$154.42 Million

$2.35 Billion

 $59.31 Million

Dividend   Yield

2.00%

1.50%

N/A

Short   Position

10.20%

1.40%

5.80%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Dunkin’ Brands is considerably weaker than the industry average of 0.90. The debt-to-equity ratio is very alarming. Dunkin’ Brands and its investors might not have to worry now, but when interest rates eventually increase, there is likely to be a problem. Don’t be surprised if Dunkin’ Brands is forced to eliminate its dividend at some point down the road.

Debt-To-Equity

Cash

Long-Term Debt

DNKN

5.32

$252.62 Million

$1.86 Billion

SBUX

0.11

$2.46 Billion

$549.60 Billion

KKD

0.10

$66.33 Million

$25.74 Million

 

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T = Technicals Are Strong

Dunkin’ Brands has outperformed Starbucks over the past year, but the biggest winner has been Krispy Kreme. That said, it’s highly unlikely for Krispy Kreme to be the big winner in this group over the long haul. Krispy Kreme is also the only company of the three that doesn’t offer and yield.

1 Month

Year-To-Date

1 Year

3 Year

DNKN

2.49%

18.52%

33.89%

N/A

SBUX

-1.50%

8.16%

3.30%

144.0%

KKD

1.63%

59.17%

118.30%

220.40%

 

At $39.13, Dunkin’ Brands is trading above all its simple moving averages.

50-Day   SMA

37.17

100-Day   SMA

34.92

200-Day   SMA

33.11

 

E = Earnings Have Been Improving             

Revenue and earnings have consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   millions

N/A

538.07

577.14

628.20

658.15

Diluted   EPS ($)

N/A

0.55

0.42

0.35

0.93

 

When we look at the last quarter on a year-over-year basis, we see a decline in revenue and an increase in earnings. Revenue has also declined on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2013

Revenue   ($)in   millions

168.50

152.37

172.39

171.72

161.70

Diluted   EPS ($)

0.05

0.21

0.15

0.26

0.31

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

The industry has performed well over the past several years, which should come as no surprise considering caffeine is mildly addictive. However, the industry isn’t as safe of a play as many people think. If the economy turns south, then more people will turn to cheaper alternatives, and they will most likely consume these cheaper alternatives at home.

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Conclusion

Dunkin’ Brands is on the verge of being overleveraged. The stock is also expensive and ahead of itself. But in this economic environment, nobody seems to worry about anything. Therefore, the stock could continue its relentless ascent. That said, over the long haul, Starbucks is likely to be a better option based on its continuous growth, healthy balance sheet, cash flow, and loyal customer base.

Dunkin’ Brands is a WAIT AND SEE.

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