Investors are applauding Dunkin' Brands' (NASDAQ:DNKN) decision Monday to continue expanding its Dunkin' Donuts and Baskin-Robbins franchises in the great state of Texas. The 17 new franchised locations, in cities stretching from Abilene to San Antonio in central Texas, will push past 50 the number of restaurants slated to open in Texas, announced in just the past few months. News of the expansion probably contributed to the company's modest share price gain in ordinary trading Monday, and to the after-hours gain as well.
Investors seem to be thinking: Pretty soon, you won't be able to swing a dead cat in Texas without hitting a Dunkin' Donuts shop.
PUBLIC SERVICE ANNOUNCEMENT: the Texas Health and Human Services Commission discourages the swinging of deceased mammals of any sort (esp. cats, rats, cattle) in the vicinity of public eateries. Aficionados of feline flinging are encouraged to direct their missiles into neighboring Oklahoma.
In fact, Dunkin' says it has "over 100 restaurants planned to open over the next several years" in Texas. Yet while that's a big number, it still represents just a fraction of the roughly 500-new-restaurants-a-year pace the company has set so far this year.
Time to count the donuts
So how big of a deal is this Texas-sized expansion for Dunkin'?
Let's put it in context. At last report, Dunkin' Brands had more than 10,600 Dunkin' Donuts restaurants in operation around the globe, plus more than 7,000 Baskin-Robbins restaurants. Roughly 17,700 retail outlets total, and that's not counting the grocery stores that sell the firm's coffee brand (production of which is licensed to J.M. Smucker (NYSE:SJM).
Even 100 new restaurants in Texas -- and those opening over a span of years -- represents just 0.5% of growth for Dunkin, and will not move the needle much toward hitting the firm's projected 16% annualized rate of profits growth, much less accelerate it.
For that matter, even the 150 restaurants that Dunkin' recently said it plans to open in the United Kingdom over the course of five years works out to about 0.17% store growth each of those years. Yet that news somehow sparked a 2% rise in Dunkin' stock last Thursday.
Growth initiatives like what we saw this week in Texas, and last week in the U.K., are necessary for Dunkin' Brands, no doubt. But in the broader context of a 17,700-outlet coffee 'n' doughnuts 'n' ice cream shop, they're still pretty small potatoes. They don't justify the rise we've seen them inspire in Dunkin' shares. Nor do they justify investors paying 39 times earnings for a stock growing at just 16%.
Meanwhile, archrival Starbucks (NASDAQ:SBUX) boasts a lower valuation than Dunkin' (36 times earnings) and a larger store count (19,200-plus stores) yet somehow continues to grow faster than Dunkin' (with better than 31% trailing annualized profits growth, and nearly 20% annual growth projected). While I'm far from convinced that even Starbucks shares are cheap enough to buy, I know one thing for sure: By comparison, Dunkin' shares are even more overpriced.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.