Dunkin' Brands: Donuts and Dollars

03/27/2015 8:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

In the 1950s, Bill Rosenberg opened his first restaurant, named Dunkin' Donuts. At about the same time, Burt Baskin and Irv Robbins were each starting a chain of ice cream shops, notes Tyler Laundon, editor of Top Stock Insights.

These three entrepreneurs joined forces and today Dunkin' Donuts and Baskin-Robbins are owned by the publicly-traded company, Dunkin' Brands (DNKN), arguably the most attractive name in the quick-serve restaurant space.

It is also very shareholder-friendly, which is why institutional investors closely guard their positions in the stock. It expects to buy back $700 million of shares this year (nearly 15% of the market cap) and the stock yields over 2%.

The international opportunity is huge for Dunkin' Brands. The company's global footprint grew significantly in 2014, as the company opened 282 net new stores outside of the US.

In addition, Dunkin' agreed with a franchisee to open over 1,400 stores in China within the next 20 years.

But it's the US market that I'm most excited about. Dunkin' Donuts is a well-known brand in the northeast, where there is one store for every 8,200 residents.

But move west and that store count drops quickly. In fact, once you get near the middle of the country, the restaurant is basically non-existent, with only one store for every 500,000 people.  

And it's going after that opportunity, with plans to double its US store count from 8,062 to over 17,000 within the next twenty years.
Meanwhile, virtually all of its restaurants are owned by franchisees. The company earns regular income from franchisees in the form of royalties, franchise fees, and rent.

The company's almost 100% reliance on franchisees will help advance its expansion plans as franchisees fund the majority of new restaurant development, as well as the majority of advertising costs.

At the moment, market expectations are relatively low. But if Dunkin' Donuts achieves its targets, the stock will have already moved higher. So this lull is an opportunity for patient investors to build a position in an excellent business.

This isn't a company that is going to have a sales explosion overnight, instead, it is a very steady and consistent grower that investors can buy and hold on to for the long-term. Dunkin' is, in my opinion, the best in the business.

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