Dunkin' IPO a slam dunk
The corporate parent of the coffee and breakfast giant goes public at a steep premium, fueled by aggressive growth plans. The stock jumps more than 40%.
Updated: 4:37 p.m. ET
By Jeff Reeves, Editor, InvestorPlace.com
According to the slogan, America already "runs on Dunkin'." But after a nearly $424 million IPO Wednesday morning and aggressive expansion plans to satisfy shareholder appetite, Dunkin' Brands Group (DNKN) hopes the world will run on its doughnuts and coffee soon.
Dunkin' plans on doubling its U.S. store count and making an ambitious move into emerging markets -- adding 500 stores a year.
On its first day of trading Wednesday, the stock was up 46.6%, closing at $27.85 from an opening price of $19.
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If you're a consumer, the Dunkin' IPO means the iconic orange-and-purple signs might be popping up in a town near you. The company remains focused on the East Coast, but the influx of capital will allow the coffee-and-doughnut shop to open its doors in new markets that include the West Coast, Asia and South America.
You might even see more Dunkin' Donuts-brand packaged goods at the supermarket. Dunkin' was wildly successful with its 2008 push into packaged coffee that now reaches roughly 40,000 retail locations nationwide. As an encore, it could take a play from Starbucks' (SBUX) book and peddle other items -- coffee ice cream, snacks, bottled drinks and so on. Retail sales would be a great way to build the profits of a newly public Dunkin' Brands.
If you're an investor, you should be watching the stock's growth plans closely. Dunkin' Brands went public this morning priced at $19 per share -- a fairly steep premium above rivals in the space that implies a staggering trailing price-to-earnings ratio at over 80. Compare that with SBUX, which has a trailing PE of 28. The Dunkin' premium clearly assumes big growth.
Considering DNKN jumped about 40% after the opening bell to over $27 a share, at least a few investors are buying the growth plan.
There's good reason to think the company has a bright future. In the run-up to its IPO, the company touted the fact its sales grew 7.3% in fiscal 2010 to outpace specialty beverage rivals like Starbucks and McDonald's (MCD). Throw in the aforementioned growth plans in America and abroad, and you can imagine some impressive numbers in years to come.
On the other hand, anyone looking at this stock should be painfully aware of the massive debt that offsets its impressive revenues. Consider that Dunkin' Brands pulled in $577.1 million in revenue in 2010 -- but just $26.9 million in net income. A big reason: The company paid almost $113 million in interest on its debt load last year. That's a huge drag on profits.
The IPO will raise a big chunk of cash to pay down some of that debt, but don't kid yourself -- the private-equity firms that bought Dunkin' Brands in 2006 for about $2.4 billion are looking to get their money back and make the debt the problem of shareholders. Dunkin' will have almost $1.5 billion in debt even after the IPO, and the company's book value -- its assets minus its liabilities -- is in negative territory.
So consumers and investors alike have good reasons to watch the growth of DNKN. The difference is that folks who love the store's pastries and Coolattas will have only their sweet tooth riding on the expansion. For investors who bought into this IPO, however, their investment hinges on the company's ability to grow fast enough to offset its massive debt.
Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
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Remember the IPO process
1. Company cuts deal with Wall Street to sell X many shares at $Y dollars each. 2. Wall Street takes a cut of the proceeds. 3. Wall Street sells the limited shares to a select and favored few. 4. The IPO gets hyped to the max in the media and shares take a steep jump immediately after opening. 5. The original select few holding shares at 9 am dump their shares as soon as possible pocketing a 40% profit in less than one day. 6. Wall Street puts more money in their pocket from the IPO than does the offering company. 7. All but the original select few lose their shirts within 30 days. 8. Repeat as often as possible
Has anyone actually been into a Dunkin’ Donuts lately? I say this because I had not, until this past Christmas (2010), when I was given a Dunkin’ Donuts gift card. It took me a while to use my card (May 2011).
They were not on my radar anymore, they use to be. They owned my donut consumption during the 80’s. But in the 90’s donuts, we were told, were bad for us and a better alternative was Bagels. I spent the 90’s eating bagels. Then it turned out that the bagels had just as many calories as the donuts, so back to donuts.
By now there was a Krispy Krème store just up the road from my local Dunkin’ store. They always had hot fresh ones and you could smell the store from a mile away, it’s like ringing a dinner bell.
Starbucks had long ago won my coffee and tea purchases.
I had heard that Dunkin’ now offered a breakfast and lunch menu, but for me, that need was already being filled with other choices. But I had this gift card so I thought I would try it for lunch.
I was surprised when I walked into the store. Gone were the wall of donuts that use to line the back wall. It had been reduced to just two columns of donut baskets. The rest of the space was now devoted to the breakfast and lunch menu and specialty drink machines.
I was really glad I wasn’t there for donuts. I had my mother with me that day so we both ordered sandwiches. We tried to order tea and soft drinks but they didn’t have any. Just coffee, bottled water and fruit juice.
The staff was very pleasant and helpful, but the food, unfortunately was terrible. We did not finish the sandwiches. I still had money left on the card so we selected a couple of donuts that remained. They were stale. We didn’t finish those either.
So, Wall Street has crunched the numbers and found Dunkin’ to be a great opportunity. We crunched the food and found otherwise.
Dunkin Doughnuts will go up and then it will be dumped. Those who invested first will leave the foolish behind raking in the profits. DONT BUY
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