Is Dunkin’ Brands a Sweet Investment?

With shares of Dunkin’ Brands Group (NASDAQ:DNKN) trading at around $40.06, 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

There are many important points to cover for Dunkin’, but let’s first take a look at what Dunkin’ Donuts has to offer in regards to food and beverage. This has the potential to serve two purposes, which are to inform investors of what they might be investing in, and to inform all readers what they might be eating or drinking in the near future.

Even if you frequent Dunkin’ Donuts, it’s not likely that you know the entire menu. Most people walk into Dunkin’ Donuts knowing exactly what they want. This has a lot to do with either a slight caffeine addiction (don’t worry, that’s perfectly normal) or a craving for a donut or ice cream. Okay, so let’s get to it.

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Breakfast Sandwiches

Bacon Egg & Cheese

Big N’ Toasted

Egg White Flatbreads

Egg & Cheese

Glazed Donut Breakfast Sandwich

Ham Egg & Cheese

Sausage Egg & Cheese

Turkey Sausage Breakfast Sandwich

Wake-Up Wrap

 

Bakery Sandwiches

Chicken Salad Sandwich

Chicken Sandwiches

Ham & Cheese

Texas Toast Grilled Cheese

Tuna Salad & Chicken Salad Wraps

Tuna Salas Sandwiches

Turkey, Cheddar & Bacon

 

Bakery

Bagels and Bagel Twists

Cookies

Danishes

Donuts

Hash Browns

Muffins

Munchkins (so underrated)

 

Hot Beverages

Beverage Flavors

Box O’ Joe

Cappuccino

Dunkaccino

Espresso

Hot Chocolate

Hot Coffee

Hot Tea

Latte

Mint Hot Chocolate

Vanilla Chai

 

Iced Beverages

Beverage Flavors

Iced Coffee

Iced Latte

Iced Sweet Tea

Iced Tea

 

Frozen Beverages

Berry Blast Coolatta

Blue Raspberry Coolatta

Frozen Caramel Coffee Coolatta

Frozen Coffee Coolatta

Frozen Mocha Coffee Coolatta

Hot Chocolate Coolatta

Minute Maid Orange Coolatta

Raspberry Lime Coolatta

Strawberry Coolatta

Vanilla Bean Coolatta

 

At Home Brewing

K-Cup Packs

Packaged Coffee

Packaged Tea

 

There has to be something on that list that you will enjoy! That, in turn, is the point. Dunkin’ is very good at attracting new customers that then become loyal to the brand. Dunkin’ is also looking to penetrate west of the Mississippi River. If successful, it could lead to substantial growth opportunities. Management is also aiming to add between 300 and 600 units in the United States this year alone. Companies that are opening stores/restaurants are often highly confident in their future prospects. It should also be noted that this is in an environment where most companies are closing stores/restaurants, or at least cutting costs in a massive way. All that said, this growth comes at a cost. Dunkin’ does have some substantial debt concerns. On the other hand, management has been making strategic moves to better manage the debt.

The ultimate concern here is that Dunkin’ suddenly finds itself in a weaker economic environment where the stock market suffers a steep correction and interest rates increase. However, this has been a concern for a long time, and while the concern is justifiable, it never becomes a reality. It’s possible that savvy investors are simply mistiming the market and underestimating the power of the current upward momentum in the market.

The chart below shows some basic fundamentals for Dunkin’ Brands, Starbucks Corporation (NASDAQ:SBUX), and McDonald’s Corp. (NYSE:MCD). Some readers might wonder why Krispy Kreme Doughnuts (NYSE:KKD) isn’t on the list, but as Krispy Kreme CEO James Morgan admits, Dunkin’ Brands and Starbucks are largely beverage companies whereas Krispy Kreme is more focused on doughnuts.

DNKN SBUX MCD
Trailing P/E 42.75 32.25 18.17
Forward P/E 22.13 24.13 15.70
Profit Margin 15.90% 10.80% 19.79%
ROE 19.24% 28.97% 36.59%
Operating Cash Flow 139.86M 2.55B 7.02B
Dividend Yield 1.90% 1.30% 3.20%
Short Position 7.80% 1.30% 1.00%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.
T = Technicals Are Mixed

Dunkin’ has performed well over the past year as well as year-to-date, but momentum has slowed. Does this present a buying opportunity, or should it act as a warning sign?

1 Month Year-To-Date 1 Year 3 Year
DNKN -0.11% 21.87% 30.56% 1.11%
SBUX 5.42% 19.14% 23.51% 150.0%
MCD -3.28% 12.81% 16.71% 58.54%

At $40.06, Dunkin’ is trading above its averages.

50-Day SMA 39.85
200-Day SMA 36.24
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E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Dunkin’ is much weaker than the industry average of 0.90. In the current economic environment, it’s possible to get away with using a lot of leverage to fuel growth. However, there will eventually be a price to pay.

Debt-To-Equity Cash Long-Term Debt
DNKN 5.32 179.19M 1.84B
SBUX 0.10 1.70B 549.60M
MCD 0.84 1.87B 12.80B

E = Earnings Have Been Steady

Earnings and revenue have consistently improved on an annual basis.

Fiscal Year 2009 2010 2011 2012
Revenue ($) in millions 538 577 628 658
Diluted EPS ($) NA 0.28 0.32 0.93

Looking at the last quarter on a year-over-year basis, revenue and earnings improved. Both revenue and earnings have been consistent without being overly impressive on a sequential basis.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 152.37 172.39 171.72 161.70 161.86
Diluted EPS ($) 0.21 0.15 0.26 0.32 0.22

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 Support the Industry                         

The cost of coffee has decreased 24 percent over the past year, which has helped the industry a great deal. Coffee prices are off their lows, but they’re not expected to shoot higher unless there is a major weather event that significantly impacts commodity prices.

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Conclusion

Dunkin’ has a strong brand, and it’s likely to become stronger in the coming years. Annual revenue and EPS growth have been steady, and margins are impressive. On the other hand, Dunkin’ is currently trading at 43 times earnings. Therefore, there isn’t much margin for error. Furthermore, stock performance has been subpar over the past month and debt management is still a concern.

Dunkin’ is pretty simple to figure out when it comes to stock performance. It hasn’t been public for long, but since its IPO, it has largely traded with the market. Therefore, if you believe that the broader market still has legs, then Dunkin is an OUTPERFORM. If you don’t believe that the market has legs, or that a sudden crash could wipe out years of gains, then Dunkin’ is a WAIT AND SEE. Many investors would agree that the market still has legs, but that it won’t end well. Nobody knows for sure. Time will tell.

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.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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