Coffee Shop in Bullish Trend

07/18/2012 11:45 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

While its West Coast rival may have locked down the title King of Coffee, this player has its own niche that it's expanding quite nicely says Mark Skousen of Hot Commodities Alert.

Dunkin' Brand Group (DNKN), which owns Dunkin’ Donuts, is much smaller than Starbucks (SBUX) in terms of revenues and employment. Starbucks has $12.6 billion in revenues!

But Dunkin’ Brands has much more room to expand its franchises, especially out West and in foreign countries. It just opened up its first store in California. It’s about ten years behind Starbucks.

The company plans to double the number of its Dunkin’ Donuts stores in the United States to 15,000 in the next 20 years. I think it will become the "go-to" choice for coffee, donuts, and even quasi-healthy fast food.

Dunkin' Donuts now offers breakfast foods, such as the sausage, egg, and cheese on an "everything" bagel. And the coffee is highly drinkable, relatively inexpensive, and attitude-free.

The company also owns also owns Baskin-Robbins’ ice cream stores. These stores are a bit of a drag on financial performance, and the parent company is closing some of the stores. But it is expanding Baskin-Robbins' franchises in Vietnam, Mexico, and the United Kingdom.

With profit margins around 10%, Dunkin’ Brand Group earned $62 million on revenues of $641 million in the past 12 months. DNKN also has a return on equity (ROE) of 12%.

The current price-to-earnings ratio appears high (64), but that ratio reflects several one-time expenses last year and does not indicate true value. These one-time expenses included a loss on the repayment of debt, costs related to secondary offerings, impairment charges related to a South Korea joint venture, and a sponsor termination fee.

The forward P/E is estimated to be almost 28, which is not cheap but is nowhere near overvalued. In addition, the money raised from the company's IPO last year was used to retire long-term debt. As a result, the company now has a much better cash flow.

Overall, I see a bright future for Dunkin’ Brands. Let’s buy it and set a protective stop of $28 a share here.

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