Will This Top Performer Blow Away Earnings?

Earnings season can make or break a stock for the next three months. Dunkin' Brands Group (DNKN) is geared for a blowout quarter. The last time Dunkin' reported third quarter results it grew earnings 32% year over year, its biggest yearly growth since going public in 2011. The stock is up an impressive 38% year to date and still has plenty of room to run.

The Dunkin' family
Dunkin' Brands Group owns, operates, and franchises quick service restaurants under the Dunkin' Donuts and Baskin-Robbins brands. Dunkin' Donuts is 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 in the industry.

Last numbers out
On July 25, Dunkin' announced second quarter results. The numbers were mixed and looked like this:

Domestic same store sales were higher than expected, with Dunkin' Donuts growing 4% and Baskin-Robbins growing 1.6%; this growth, the addition of 151 net new stores globally, and product innovation allowed the company to grow earnings a very strong 24.2% year over year. Even with all of these positives, the most impressive statistic was its adjusted operating income margin, which expanded 420 basis points to 50%. Dunkin' Brands has been on a tear in 2013 and earnings have been one of the main reasons analysts are so bullish on the stock going forward.

Projections and what to look for
Dunkin' Brands is scheduled to report third quarter earnings next week, on Oct. 24, before the market opens. Currently, analysts project the company to report earnings growth on both the top and bottom lines compared to last year. Here are the consensus estimates:

These two statistics will be key to whether or not the stock will pop on earnings day. However, I believe the most important update to look for is the company's expansion plans in the western United States. On July 25, Dunkin' announced agreements with four franchise groups to open a total of 45 restaurants in southern California and another agreement for 19 restaurants to be opened in southern Texas with one of its existing franchise groups. Additional agreements for store openings will provide a boost to future earnings projections because of the increased franchise fees, royalty income, rental income, and other revenues that these agreements will bring. For a nearly 100% franchised business model like Dunkin's, the more locations added in areas with large consumer bases, the better. 

Because Dunkin' is a high growth company, any sort of dividend would be a major plus to the stock and it sports a healthy 1.64% yield. After going public in 2011, it began paying dividends in March of 2012 and increased the annual dividend by 26.7% in 2013. With revenues on the rise and net profit margins increasing, I believe Dunkin' Brands could raise its dividend by 10% to 15% for the next several years to maintain a yield around 1.5% to 1.75%. This will provide additional boosts to the stock and higher returns to shareholders who invest for the long term.

Update from August
On Aug. 27, I took a deep look into Dunkin' Brands and compared it to two competitors, Starbucks (SBUX 0.29%) and McDonald's (MCD -0.43%). After thorough analysis, I concluded that both Starbucks and Dunkin' had large upsides while McDonald's was showing weakness and slowed growth. Here are the performances of these three companies since that day:

• Dunkin' Brands: +8.58%
• Starbucks: +9.34%
• McDonald's: (1.1%)

I still believe Dunkin' and Starbucks will be two of the top performing stocks in 2014, even after runs of over 35% for both in 2013. Starbucks will report earnings on October 31 and I expect another blowout from the company; any weakness in this stock is nothing more than a buying opportunity. McDonald's can easily be considered a value play at just 15.35 times forward earnings with a healthy 3.4% dividend, but I would wait until after its earnings report on Oct. 21 to make any decision about an investment. 

The Foolish bottom line
Dunkin' Brands is a fast-growing company with a myriad of positives on its side. It has grown earnings consistently over the last two years and is set to report third quarter results next week. Take a look and see if your portfolio has a spot for Dunkin' Brands.