Dunkin' Donuts can't stay dunked forever

International growth and recession-resistance make this stock look like a bargain after recent fall.

By Trefis Jan 4, 2012 3:14PM
Image: Baker (© Blend Images/SuperStock)Dunkin' Brands Group (DNKN) stock has fallen by nearly 10% in the last three months, while the Dow Jones Industrial Average has risen by 10%, marking a 20 percentage point outperformance for the benchmark index. DNKN is close to its 52-week low of $23.24, which it set in early November after reported income fell 60% amid efforts to pay back debts to private equity firms.

These one-time expenses mask strong revenue growth and a lack of bad news, suggesting that investors are exiting more because of broader market concerns than any fundamental failing in Dunkin' Donuts itself.

Dunkin Brands Stock Break-Up

Despite the drop in Dunkin' stock, the company's financials haven't changed substantially in the past couple of years. Since it produces coffee and cheap snack foods in the retail market, as well as coffee and condiments for households, it is as close to recession-proof as a company can get.

The company's performance demonstrates the strong demand for its products. For over two years, its net profit margin has remained unchanged at around 4.5%. While revenue understandably declined in 2008, this trend quickly reversed in 2009 and increases continued in 2010 and 2011. Sustained, steady growth makes Dunkin' Brands an attractive investment for a conservative investment profile, so its falling price and low average volumes (a little over a million shares have been trading per day) reflect broader economic anxieties than flaws in the company.

Dunkin' Brands is a household name in the United States thanks to its donut shops and Baskin-Robbins ice cream shops, which have maintained market dominance despite competition from Cold Stone Creamery. But the company's real growth potential comes from an unlikely place: Asia.

Dunkin Brands Dunkin Donuts Intl Total Number of Outlets

Dunkin' Donuts is a staple of shopping districts in Japan, South Korea, Malaysia, and Indonesia. Baskin-Robbins is also widespread in Thailand, Taiwan, and Singapore. Dunkin' Group's international operations have been nimble, readily adapting to different cultures and integrating itself into new urban landscapes overseas.

While Asian Baskin-Robbins shops would be recognizable to an American, the Asian Dunkin' Donuts serve a different social function; with plush chairs, bright LCD screens on the walls, and vibrant colored decor, Dunkin' Donuts is a trendy hotspot for Asian urbanites who see it more as a cafe than a donut shop. Despite competition from Starbucks (SBUX), Krispy Kreme (KKD), and local brands, Dunkin' Donuts has grown steadily in Asian markets for quite some time, and there is plenty of room to further growth.

Currently, Dunkin' Donuts International accounts for only 3.14% of the firm's Trefis price, which is nearly 20% over the current market price. Baskin-Robbins is a hearty 28.87% of the firm's stock price. Since the group is well situated in several robust Asian markets, I expect the international operations to grow steadily in the coming years, which will force upward pressure on the stock.

Even if international operations stay flat, the stock is likely to rise since economic uncertainty has hit it unfairly hard in recent months and the company recently proved itself recession-resistant. November's downward pressure on the stock is turning it into a real bargain.

See our full analysis for Dunkin' Brands Group

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