One Sweet IPO

Dunkin' Brands recently filed for an IPO to put doughnuts and ice cream on Nasdaq's menu. Pricing and full details haven't been released, but Fools can work up valuations ahead of time so we'll know whether the offering price is a rich, jelly-filled premium or baker's dozen discount.

In addition to Dunkin' Donuts, Dunkin' Brands owns the Baskin-Robbins ice cream brand. Both brands are divided into U.S. and international segments. Revenue from each of the four segments is shown in the table below. Nearly all Dunkin' Donuts and Baskin-Robbins stores are franchised, so Dunkin' Brands' revenue is primarily franchise and royalty fees and rental fees.

 

U.S.

International

Totals

Dunkin' Donuts $402.4 $14.1 $416.5
Baskin Robbins $42.9 $91.3 $134.2
Totals $445.30 $105.40 $550.7

Source: Dunkin' Brands S-1 SEC filing. Numbers in millions.

Dunkin' is currently owed by funds from Bain Capital, The Carlyle Group, and Thomas H. Lee Partners. That raises the question, if Dunkin' is a great investment, why are the funds offering the rest of us a scoop of the ice cream and what's the money being used for?

The money raised from the IPO -- about $400 million-- plus another $100 million in new debt will be used to pay down existing 9-5/8% notes. The note buyback combined with the additional borrowing will leave the company with $1.5 billion in debt. The current owners aren't selling off all the treats, since they'll still hold a majority interest in the company. However, the current owners did take a big bite of the doughnut with a $500 million dividend last December. There are no plans for Dunkin' Brands to pay a dividend going forward. This is all standard operating procedure for private equity.

So what's it worth?
A group of other companies in the restaurant business makes a good starting point for valuing Dunkin' Brands.

 

P/E (TTM)

Est. 5-Year Growth Rate

Dividend

Panera Bread (Nasdaq: PNRA  ) 30.7 17.7% N/A
Cheesecake Factory (Nasdaq: CAKE  ) 22.0 14.4% N/A
Yum! Brands (NYSE: YUM  ) 22.2 12.8% 1.9%
Starbucks (Nasdaq: SBUX  ) 25.5 18.1% 1.4%
Tim Hortons (NYSE: THI  ) 13.3 15.0% 1.4%

Source: Yahoo! Finance.

Dunkin' Brands earned $26.9 million in 2010. Back out one-time financing expenses and earnings would have been $88.8 million. Dunkin' Donuts has grown U.S. same-store sales by 2.8% in the latest quarter. Combined with plans to grow distribution points by about 4% per year, that totals about 7% forward sales growth.

Panera and Cheesecake Factory both offer solid growth prospects and a stronger balance sheet than Dunkin' Brands. Tim Hortons adds a decent dividend to the recipe. Starbucks and Yum! Brands sprinkle a helping of proven international growth on top. None of that means Dunkin' Brands will be a bad investment, but it does mean the company should price at a discount to the peer group in order to be a good value.

I'd get interested at a price putting the total market cap for Dunkin' Brands at roughly $1.2 billion or a P/E around a baker's dozen. Others may come to different conclusions, but Foolish investors should crunch the numbers before ordering a double scoop of Dunkin' Brands.

Since this is a popular brand, I'm sure those who get in on the offering and some nimble traders will do well in the trading sugar rush following the IPO. This Fool plans on watching the excitement over a doughnut and coffee.

Related Foolishness:

Fool contributor Russ Krull has no financial position in any of the companies mentioned in this article. Panera Bread and Starbucks are Motley Fool Stock Advisor recommendations. Tim Hortons is a Motley Fool Global Gains selection. The Fool owns shares of Starbucks and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy with frosting and sprinkles on top.


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