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Company Dunkin Brands (Nasdaq: DNKN  )
Submitted By: TSIF
Member Rating: 99.94
Submitted On: 7/27/2011
Stock Price At Underperform Recommendation: $28.88

Targacept profile
Star Rating *
Headquarters Canton, Massachusetts
Industry Restaurants
Market Cap $3.34 billion
Industry Peers Green Mountain Coffee Roasters (Nasdaq: GMCR  )
Teavana (NYSE: TEA  )
Coffee Holdings (NYSE: JVA  )

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
I really like Dunkin' Brands over some of the other brands. I really have trouble trying to figure out the menu in Starbucks [ (Nasdaq: SBUX  ) ]. I know a lot of our passion for coffee came from Italy, but latte, vende, grande, etc. are just a little too much for this simple country boy. Krispy Kreme Doughnuts [ (NYSE: KKD  ) ] is fairly popular where I'm from. I really thought they were in trouble [when] the diet fads started circulating. In small towns, however, the regulars, especially government workers seem to have kept business going. Overall, though, they don't seem to innovate, and I don't see much growth. So now being a New Englander by adoption (whether they want me or not), I've come to like Dunkin' Brands the best.

Their menu is easy to understand. They try to innovate. They change up their menu and now offer K-Cups. Overall though, they are saturating this market. I won't be surprised someday if I see a Dunkin Doughnuts inside of a Dunkin Doughnuts! I'm not sure what a few franchise owners were thinking. One of the early Dunkin Doughnuts in my area closed recently. They didn't have a drive thru and were on a tough corner to get in and out of.

I thought all the coffee shops were in trouble when the economy took the hit. It seems people who don't have gas money will buy expensive coffee. I saw one guy the other day grab a small coffee for $1.89 and then put $3.00 in his gas tank. Guess he could have put $3.11 if he hadn't tipped the server, who did nothing unusual [to warrant] the $0.11.

Then came K-Cups and the brew-at-home model, then McDonald's [ (NYSE: MCD  ) ] got into the act with some variety and lower prices. The Cumberland Farms (gas station chain) has decent brew for $1 any size.

So [in the] two-mile stretch of a very rural area, I have Dunkin, Cumberland, McDonald's, Cumberland, Dunkin.

So my downthumb, even though I like their menu? The IPO is good news for the three private equity firms who took Dunkin' private in 2006, but they leveraged the heck (tech term for "up to the eyeballs"), ($2.4 Billion) out of it. Most of the IPO is directed at the debt load, but it really only pays down about 25% of it. There will still be $1.5 billion in debt to service and the bonds pay north of 9%. The equity holders for their long term investment paid [themselves] a $500 dividend and still own 75% of the brand. Service on the $1.85 billion left on the debt load was about 58% of earnings. The $400 million raised in the IPO will still leave a hefty drain.

The two brands, Dunkin' and Baskin Robbins are doing so-so in the growth area. Baskin Robbins, the number one ice cream chain has had declining revenues. The Doughnut side saw decent growth before the recession, took a two year hit and has started climbing again slow. Overall, the brand is about where it was before the recession. With the debt service, Dunkin' Brands has been wobbling on turning a profit.

While it's early in the IPO world, Dunkin' Brands does have some numbers we can use. With a 10% growth rate, and 16% in margins, with the $26 per share now, we're looking at about $0.75 per share and about 30X earnings.

So while I like their coffee, like their menu, and like their growth overall through the recession, I can't get behind the stock above the $18 IPO range. Now off to McDonald's or Cumberland Farms since I don't/won't have any Dunkin' Brands stock to prop up.

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The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words.

The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain, Starbucks, and McDonald's. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain. Motley Fool newsletter services have recommended shorting Green Mountain. 

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Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2011, at 5:26 PM, TSIF wrote:

    Hi Dan, thanks for the callout. New IPO's carry a lot of early hype. While I'm sure many investors disagree with my call, I would suggest they wait at least 2-3 more weeks if they can't hold for the 2-3 quarters one should on an IPO.

    Dunkin does have more data than many of the recent internet IPO's but the IPO leads and the three hedge funds that own it had access to that data and priced the IPO at $19. There might be a growth story here if growth is properly implemented, but the best investments are made at the lower prices, which usually, granted not always is after the IPO dust has settled, Options become available and Shorts make their plays.

    P.S. can you check the link to the pitch....

    "This Week's Pitch" currently links to a pitch on AIXG.... must be the goats or the monkeys messing around again.

    Thanks!

    TSIF

  • Report this Comment On August 03, 2011, at 6:26 PM, TSIF wrote:

    Truth......Tell us how your really fell..... ;)

    Oops.....I think you did!!! ;)

    Have a cup of coffee, (decaf) and unwind while you reread the book! ;)

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