Should You Dip Into Dunkin’ Brands After Earnings?

With shares of Dunkin’ Brands (NASDAQ:DNKN) trading around $47, 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.

On Thursday morning, Dunkin’ Brands, the parent company of Dunkin’ Donuts and Baskin-Robbins, reported earnings results for the third quarter ended September 28, 2013. Dunkin’ Donuts U.S. comparable store sales grew 4.2 percent and the company added 222 net new restaurants worldwide including 81 net new Dunkin’ Donuts in the U.S. ”Both Dunkin’ Donuts and Baskin Robbins U.S. continue to have excellent momentum and delivered another quarter of strong comparable store sales and net new restaurant growth,” said Nigel Travis, Chairman and Chief Executive Officer, Dunkin’ Brands.

T = Technicals on the Stock Chart are Strong

Dunkin’ Brands stock has been trending higher in the last several years. The stock is currently trading slightly below all time high prices but looks ready to head higher . 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 above its rising key averages, which signal neutral to bullish 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

21.80%

20%

19%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

November Options

Flat

Average

December Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

10.81%

24.24%

16.00%

131.50%

Revenue Growth (Y-O-Y)

5.83%

5.86%

9.45%

-4.04%

Earnings Reaction

-0.73%*

-1.73%

3.66%

2.04%

Dunkin’ Brands has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been upbeat about 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

43.49%

47.44%

7.40%

-0.68%

23.14%

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. A recent earnings release has investors expecting a little more from the company. The stock has been exploding to the upside and is currently trading slightly below all time high prices. Over the last four quarters, earnings and revenue figures have been rising which has produced upbeat investors in the company. 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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