Yesterday, the IPO of Dunkin' Brands
But the market is now pricing Dunkin' shares at 17 times EBITDA, which looks dear compared to competing donut-frier Tim Hortons
Chris Baines, Fool.com analyst
Yes, Dunkin' Brands has a lot of debt. Is that a bad thing? Heck no.
If there any business could benefit from lots of debt, it's Dunkin'. Its nearly 100% franchised business is remarkably stable and recession-proof, since coffee and donuts are practically mandatory spending for many Americans. Dunkin's high interest expense simply means that changes in revenue will have a magnified impact on the bottom line. For a slow and steady grower like Dunkin', that's more of an asset than a liability. (Literally it's an accounting liability, but you catch my drift.)
When you combine that high debt load with the high operating leverage of a franchiser, like McDonald's
But the price, mind you, really isn't that expensive. Compared to Starbucks
Rick Munarriz, Fool.com analyst
I'm sorry. I can't view this through jelly-filled glasses: Dunkin' is no $3 billion company. We're talking about anemic top-line growth, marginal profitability, and a concept that has delivered negative store-level comps in two of the past three years. You have to go all the way back to 2006 to find the last time that comps even kept pace with historical inflation growth!
It's ironic that during the same week in which McDonald's agreed to make its Happy Meals healthier, and Whole Foods Market
I'm more worried about waste lines than waistlines, though. Dunkin' wants investors to buy into the merits of a popular franchise model, but making money here won't be as easy as sitting back and collecting passive royalties. Where are the economies of scale in this much-touted model , when Dunkin's sporting net margins of less than 5%?
I'll stick to McDonald's, thank you very much. At least there, I'm treated to consistent double-digit net margins. The world's largest burger chain also has tested its recession-resistant mettle, and it's not simply busy during the morning breakfast rush.
Anders Bylund, Fool.com analyst
We've seen plenty of this year's IPOs debuting way above the official offering price. On their respective first days of trading, Pandora
But those other high-tech IPOs didn't stay strong -- in a matter of days, LinkedIn shares had fallen by double-digit percentages, and Pandora gave up its offering premium right away. Even if both stocks have since recovered, I don't think that either one should have.
Both LinkedIn and Pandora are burning cash every quarter, and they're still struggling to figure out profitable business models. Admittedly, I'm encouraged by increasingly varied Pandora ads, now including traditional marketing stalwarts like Toyota's Lexus division. By stark contrast, Dunkin' comes in with a long and generally profitable operating history, with strong and rising cash flows.
In short, I think that Dunkin' deserves a premium, whereas many other instant market darlings don't. In fact, running Dunkin's numbers through our Inside Value newsletter's DCF calculator (click here to take the tool for a spin with a free trial) with extremely modest growth assumptions of 5% a year tells me that this stock is worth nearly $37 per share. In short, you still have a margin of safety here.
Foolish bottom line
We have two yeas and one nay from our analysts. If you need to get more fill on the Dunkin' IPO, click here to listen to our radio show. What do you think? Is it time to buy Dunkin' Brands? Let us know in the comments section below.
