The Bulls Are Out on Dunkin’ Brands

Dunkin’ Brands (NASDAQ:DNKN) has been good to shareholders over the past year. A modest dividend yield of 1.6 percent compliments the stock’s 34.9 percent year-over-year growth. Shares have come up 25.5 percent since the middle of November, outperforming its major competitor and investor darling Starbucks (NASDAQ:SBUX) for the period.

Dunkin’ Brands shares are up over 10 percent since the beginning of 2013, and two days ahead of its fourth-quarter and fiscal 2012 financial report is trading near its 52-week high of $37.22. One glance at the stock chart and it’s easy to see the momentum this company has heading into its earnings report. And while hype is a factor in any rally, Dunkin’ has the metrics to back up its bullish run.

Dunkin' Brands Group, Inc. Stock Chart - DNKN Interactive Chart - Yahoo! Finance

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Analysts at UBS highlighted some positive facets of the company on Tuesday when they reiterated their “Buy” rating and raised their price target from $36 to $40, 9.4 percent above Monday’s closing price. The analysts set 2013 and 2014 earnings growth targets of 20 and 19 percent, respectively.

“With our new target, we assume an 18% EPS growth rate over the next 3 years due to accelerated unit growth, and impending customer loyalty/mobile payment initiatives. We continue to believe investors will be willing to pay a premium multiple for companies that exhibit such highly visible and consistent EPS growth,” commented the analysts.

Here’s what that EPS growth looks like on an annual basis:

Fiscal Year 2009 2010 2011
Revenue ($) in millions 538.07 577.14 628.20
Diluted EPS ($) 0.55 0.42 0.35

And on a quarterly basis:

Quarter Sep. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012
Revenue ($)in millions 163.51 168.50 152.37 172.39 171.72
Diluted EPS($) 0.06 0.05 0.21 0.15 0.26

At a glance, not so consistent and not so upwardly mobile — EPS has actually fallen for each of the past three years, and growth has bounced up and down on a quarterly basis. But the platform for consistent growth is there…

Dunkin Cup“Having seemingly survived the coffee push of the top breakfast sandwich seller, McDonald’s, it appears that Dunkin’ is having success expanding upon its line-up of breakfast sandwiches,” the UBS analysts comment. McDonald’s (NYSE:MCD), once king of the breakfast market with the Egg McMuffin, is finding that more and more of its customers are being seduced by Dunkin’ Brands’ push to drive same-store sales growth.

That initiative has taken the form of a more diversified (and cheaper) menu, and the beginnings of a customer loyalty program. Breakfast, and coffee in particular, is a product that appeals to consumers of habit. Starbucks has had tremendous success with its rewards program, and it stands to reason that Dunkin’ can see similar success in increasing its same-store sales growth.

That being said, shares were off on Tuesday afternoon. It’s possible that, given the momentum, investors feel like the company is overvalued. Dunkin’ is trading at a trailing-twelve months P/E of 80, which compares to just 30 for Starbucks. Bad news in the earnings report could send shares tumbling off their premium. Starbucks, for its part, is coasting back down after its own strong earnings.

Dunkin' Brands Group, Inc. Stock Chart - DNKN Interactive Chart - Yahoo! Finance

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