Is Dunkin' Brands' IPO a Slam Dunk?

This article is part of our Rising Star Portfolio series.

Dunkin' Brands Group, the parent company of quick-service chains Dunkin' Donuts and Baskin-Robbins, will soon be publicly traded. Private equity firms Bain Capital, The Carlyle Group, and Thomas E. Lee Partners coughed up $2.4 billion, or 13.5 times EBITDA, for Dunkin' Brands back in 2006. The private consortium will now float out about 20% of the shares in an IPO expected soon, and hold onto the rest of the shares, along with control of the company.

Dunkin' Brands' capital-light business model, growth opportunities, and strong brand awareness create a solid and somewhat conservative investment opportunity. Much-anticipated Internet IPOs such as LinkedIn and Renren have garnered a lot of the attention for their massive growth opportunities, but how these industries shake out is still up in the air.

I'm more intrigued with oldie-but-goodie Dunkin' Brands and its predictable and proven opportunity. Dunkin' Donuts is a beast in the Northeast. Nobody does Dunkin' like New Englanders and New Yorkers, where the coffee chain dominates with one location per 9,700 people. Despite the oversaturation in these two areas, Dunkin' has plenty of room to grow nationally and overseas.

3 things investors need to know

  • Brand awareness: According to Brand Keys, Dunkin' Donuts has been No. 1 in customer loyalty in the coffee category for five straight years. According to Nielsen, Dunkin' Donuts' 12-ounce original blend coffee won the grocery coffee war last year, ranking No. 1 grocery stock-keeping item in the premium coffee category. Also, according to the company's prospectus:

    "Dunkin' Donuts holds the No. 1 position in the U.S. by servings in each of the QSR [quick-service restaurant] subcategories of "Hot regular coffee," "Iced coffee," "Donuts," "Bagels" and "Muffins" and holds the No. 2 position in the U.S. by servings in each of the QSR subcategories of "Total coffee" and "Breakfast sandwiches." Baskin-Robbins is the No. 1 QSR chain in the U.S. for servings of hard serve ice cream."

    Dunkin' Brands has more than 16,000 points of distribution in more than 50 countries. Dunkin' is hardly the only major coffee brand, as formidable competitors Starbucks (Nasdaq: SBUX  ) and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) make for stiff competition for our caffeine dollars. McDonald's (NYSE: MCD  ) is another major competitor for morning drive-thru traffic.
  • Growth: In the U.S., management has the lofty goal of more than doubling Dunkin' Donuts locations to 15,000. I'm not sure about this goal, since the same opportunity existed five years ago when the private equity group took control, but the company does have a strong franchisee base. About 90% of the stores opened last year were by existing franchisees.

    The international markets present the greatest long-term growth opportunity for the company. Primary markets for international expansion for Dunkin' Donuts include China, India, Germany, Spain, and Russia. With Baskin-Robbins declining in the U.S., the future opportunity lies internationally, where the bulk of store growth has come from since 2008. Baskin-Robbins already has more international locations than domestic ones, and has future growth plans in China, Russia, Mexico, Australia, and Indonesia.
  • What's driving cash flow: Dunkin' Donuts accounted for 76% of Dunkin' Brands' total revenues, of which 97% came domestically. About 60% of Dunkin's total sales in the U.S. are from coffee and other beverages. And 62% of the company's revenue last year came from royalties and franchise fees paid by the business owners who buy the rights to open Dunkin' Donuts and Baskin-Robbins stores.

I estimate Dunkin' Brands will earn around $125 million after accounting for its planned debt reduction. The company's earnings power is currently being held down by large interest payments on its $1.9 billion total debt load. The private equity consortium plans on using cash raised during the IPO to pay down about $400 million in debt. The share price is yet to be determined, but investors should be prepared for a market cap around $2 billion.

The date has not been set in stone for Dunkin' Brands' IPO, but I expect it within the next few weeks. When it does goes public, it will join my watchlist as I keep my fingers crossed it enters value territory within its first year on the market.

Bryan does not own any stocks mentioned in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, Green Mountain, 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. 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.


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  • Report this Comment On July 13, 2011, at 10:26 PM, rd80 wrote:

    The offering price range in the SEC filing would put the fully diluted market cap somewhere around $2.5 billion. At your estimated earnings, that puts it at a PE of around 20.

    That's a premium to MCD and about in line with SBUX. Both of those firms have stronger balance sheets, pay dividends and, I believe, have better long term growth prospects than Dunkin'.

    IMHO, the doughnuts and coffee are a better deal than the shares.

    Disclosure - long MCD.

  • Report this Comment On July 15, 2011, at 10:41 AM, ikkyu2 wrote:

    Peter Lynch used to say that an established restaurant franchise model, with a track record of success in a given market, but with room to grow, was a buy at a P/E of 20. I believe Taco Bell in the early 80's was the stock he was discussing. Possibly not a coincidence that this is where this IPO is going to wind up being priced.

    Then again, Lynch hated dilutive offerings and was not particularly thrilled about offerings to pay down debt. He liked sensible debt to fuel capital projects and expansions. So what this boils down to, I think, is management: are they equipped after this IPO to stage a nationwide, then global rollout of their brand and franchise?

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