Dunkin' For Dollars

10/08/2018 5:00 am EST


Douglas Gerlach

President, ICLUBcentral, Inc.

Dunkin' Brands Group (DNKN) operates Dunkin' Donuts and Baskin-Robbins International quick service restaurants in the U.S. and in more than 60 countries worldwide, serving hot and cold coffee and baked goods, as well as hard-serve ice cream, observes Doug Gerlach, editor of SmallCap Informer.

At the end of the second quarter 2018, the firm's franchised business model included more than 12,600 Dunkin' Donuts restaurants and more than 8,000 Baskin-Robbins restaurants.

Since its IPO in 2011, sales have grown consistently at 5.6% a year to reach $860.5 million in fiscal 2017. EPS in that same period have grown more than 30% annually.

In the company’s second quarter ended June 30, 2018, sales increased 4.9% while EPS jumped 20%, demonstrating the power that improved margins can deliver to bottom line results for the company. Future growth is likely to come from several areas.

There is plenty of room for the company to expand westward from its stronghold in the northeast U.S., and management says that more than 1000 new restaurants will be added before the end of 2020, 90% of which will be outside the northeast U.S.

Packaged consumer goods, such as ground coffee and coffee pods, are another source of growth and profitability. Already, six out of every ten cups of Dunkin coffee are purchased outside of restaurants. Dunkin’s DD Perks rewards program has 8 million members, and their purchases make up 11% of total sales.

The company expects same-store sales in the low single digits, accelerating to more than 3% by 2020. In the next three years, management projects that annual revenue growth will be in the low to mid-single digit percentages.

Analysts who cover DNKN are projected EPS growth of 13.4% annually over the next five years. In our model, with share buybacks and margin improvement continuing, we see the potential for 9% revenue growth and 15% EPS growth over the long-term.

Dunkin’ Brands is highly leveraged, with total debt around 135% of total capital. As such, this recommendation stands apart from our usual quality metrics, so investors are advised to consider the risks carefully before investing.

On the downside, a 20% price slide would see a low price of $59. From the recent price of $74, the upside/downside ratio is 4.5 to 1, and a projected annual total return of 15.7% is indicated.

Dunkin' Brands has the potential to deliver strong bottom-line results, boosted by share buybacks. On a price/cash flow basis, Dunkin’ Brands is reasonably priced and supports a somewhat higher P/E ratio than other businesses. As a result, we see a potential high price of $141 in five years, based on a high P/E of 28.

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