Is Dunkin’ Brands A Worthwhile Investment?

With shares of Dunkin’ Brands (NASDAQ:DNKN) trading around $41, 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:

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, including 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 posted earnings that beat Wall Street’s expectations, however, the company came-up short on beating revenue estimates. The revenue miss is not a positive sign for investors who seek high growth out of the company. As consumers continue to enjoy the Dunkin’ Brands products, look for the company to improve its profit streams.

T = Technicals on the Stock Chart are Mixed

Dunkin’ Brands stock has been surging higher in the last several months. The stock is now trading lower as a recent earnings report has left investors a little sour. 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 between its key averages which signal neutral 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

22.24%

0%

0%

What does this mean? This means that investors or traders are buying a very minimal 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 very minimal 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’s 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?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

24.24%

16.00%

131.50%

750.00%

Revenue Growth (Y-O-Y)

5.86%

9.45%

-4.04%

5.02%

Earnings Reaction

-1.71%*

3.66%

2.04%

1.81%

Dunkin’ Brands has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have mostly been pleased with Dunkin’ Brands’s recent earnings announcements.

* As of this writing

P = Excellent 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

23.57%

25.83%

10.50%

8.00%

14.13%

Dunkin’ Brands has been a relative performance leader, year-to-date.

Conclusion

Dunkin’ Brands provides delicious items that fulfill the sweet cravings of many consumers. The company recently reported a strong earnings report, however, investors had higher expectations. The stock has been surging higher but is taking a breather now as it digests news. Over the last four quarters, earnings and revenue figures have been rising which has led to mostly pleased investors. Relative to its peers and sector, Dunkin’ Brands has been a year-to-date performance leader. Look for Dunkin’ Brands to OUTPERFORM.

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