Don't Overlook Dunkin's Solid Quarter

Dunkin' Brands  (NASDAQ: DNKN  ) reported third-quarter earnings on Oct. 24, and it displayed growth on both the top and bottom lines year over year. However, it was a mixed quarter, with earnings per share coming in slightly lower than analysts had expected. The stock fell in the day's trading, so let's see if the decline was warranted.

The brand family
Dunkin' Brands owns, operates, and franchises quick-service restaurants under the Dunkin' Donuts and Baskin-Robbins brands. Dunkin' Donuts is one of the world's largest coffee and baked goods restaurant and Baskin-Robbins is the world's largest specialty ice cream chain. Being home to two of the world's leading brands gives Dunkin' an edge.

The results
Dunkin' Brands' third-quarter results were mixed compared to consensus analyst estimates. Here's an overview:

Metric Reported Expected
EPS $0.41 $0.43
Revenue $186.3 million $182.95 million

Source: Author's calculations. 

Dunkin's EPS grew 10.8% and revenue rose 8.5% year over year, while its operating margin expanded 310 basis points to 44.1%. But the most important metric is net income, which grew by 36.2% to $40.2 million. Although this is an impressive line, it did not meet analyst expectations, and the stock fell by 5% after the market opened on Thursday. I do not think a sell-off of this magnitude is warranted, which means this looks like a buying opportunity.

Year in review
In the nine months ended Sept. 28, Dunkin' has performed very well. Here are a few of the key statistics compared to the year-ago period:

  • Diluted adjusted EPS has risen 17% to $1.10.
  • Total revenue has increased 6.89% to $530.7 million.
  • Operating income has grown 29.6% to $222.5 million.
These stats show Dunkin' is moving in the right direction on a year-to-date basis as well as the year-over-year quarterly comparison previously discussed. Additionally, the company has repurchased about 400,000 of its shares in 2013, adding to the value returned to shareholders. Overall, it has been a solid year for Dunkin' Brands, and the stock has reacted accordingly by rising about 39% year to date.


Additional returns
On the day of the third-quarter release, management announced Dunkin' would be paying a fourth-quarter dividend of $0.19 on Nov. 26. This will bring the total dividends paid in 2013 to $0.76 and gives the company a yield of roughly 1.6%. In 2012, a total of $0.60 in dividends were paid to investors, making its current level a 26.7% increase for investors. As the company continues to expand, and its free cash flow rises, the dividend will likely also rise. 

Update on the competition
On August 27, I made a comparison of Dunkin' Brands to one of its direct competitors, McDonald's (NYSE: MCD  ) . At first thought, McDonald's may not seem like a competitor to Dunkin' Brands, but it has been revamping its menu and advertising its McCafe line of coffees and breakfast foods heavily; coffee and breakfast is Dunkin' Donuts' specialty area. On October 21, McDonald's released its third quarter report and it told a story of growth slowing worldwide. Here is an overview of the results:    

Metric Reported Expected
EPS $1.52 $1.51
Revenue $7.32 billion $7.34 billion

Source: Author's calculations. 

EPS grew 6% and revenue rose 2% year over year, but these positives were far outweighed by the negatives. The major negative was the monthly same-store sales results. Global same-store sales for September fell 0.1% versus estimates of a 1.3% increase.

Also, same-store sales for the third quarter rose 0.9% compared to estimates calling for a 1% increase. Management expects October same-store sales to remain relatively flat, which did not help its case for being a value play at current levels. McDonald's has not shown much strength in 2013, so I would stay away from this one until it starts reporting positive results and exceeding same-store sales estimates.

The Foolish bottom line
Although it may not have been the quarter analysts expected it to be, Dunkin' Brands still posted solid results. It has been a top performer in 2013, and I believe it will post a similar performance in 2014 due to forward estimates and expansion efforts worldwide. The sell-off after the report, and any continued weakness, appears to be nothing more than a buying opportunity. Take a look and see if your portfolio should run on Dunkin'.

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